UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014 

☐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 001-33391

 

DIALOGIC INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

4 Gatehall Drive

Parsippany,  New Jersey 07054 

(Address, including zip code, of Principal Executive Offices)

(973) 967-6000 

(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  ☒    No  ☐ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

As of November 7, 2014, 16,261,711 shares of the registrant’s common stock were outstanding.

 

 

 

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DIALOGIC INC. 

FORM 10-Q

For the Quarterly Period Ended September 30, 2014 

INDEX

 

 

 

 

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Note 1 – The Company

   Dialogic Inc.,  (“Dialogic” or the “Company”),  helps the world’s leading service providers and application developers to improve the performance of media-rich communications across the most advanced networks. The Company increases the reliability of any-to-any network connections, enhances the impact of applications and amplifies the capacity of congested networks, supported by a world class global services team. 

   Wireless and wireline service providers use the Company’s products to transport, transcode, manage and optimize video, voice and data traffic while enabling VoIP and other media rich services. These service providers also utilize the Company’s technology to energize their revenue-generating value-added services platforms such as messaging, SMS, voice mail and conferencing, all of which are becoming increasingly video-enabled. Enterprises rely on the Company’s innovative products to simplify the integration of IP and wireless technologies and endpoints into existing communication networks, and to empower applications that serve businesses, including unified communication applications, contact center and Interactive Voice Response/Interactive Voice and Video Response.  

   The Company sells its products to both enterprise and service provider customers and sells both directly and indirectly through distribution partners such as technology equipment manufacturers, value added resellers and other channel partners. Its customers enhance their enterprise communications solutions, their networks, or their value-added services with the Company’s products.

   The Company was incorporated in Delaware on October 18, 2001 as Softswitch Enterprises, Inc., and subsequently changed its name to NexVerse Networks, Inc. in 2001, Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010. The Company or businesses it has acquired have been providing products and services for nearly 25 years.  

Recent Developments

   On October 10, 2014, the Company entered into an Agreement and Plan of Merger with Dialogic Group Inc., (the “Merger Agreement”) a Canadian corporation (“Parent”), and Dialogic Merger Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Sub”), pursuant to which the Company would be acquired by Parent, subject to the terms and conditions of the Merger Agreement. Parent and Sub are affiliates of Novacap TMT, LP (“Novacap TMT”), a Canadian private equity firm. For additional information regarding the Merger Agreement, please refer to Note 13 – Subsequent Events.

 

Note 2 – Basis of Presentation

   The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

   The accompanying condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 are unaudited. Interim results are not necessarily indicative of results for a full year or any future interim periods. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. 

   The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2013 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the annual financial statements and include adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of September 30, 2014, results of operations for the three and nine months ended September 30, 2014 and 2013, and cash flows for the nine months ended September 30, 2014 and 2013.  

New Accounting Pronouncements Not Yet Adopted

   In May 2014, the Financial Accounting Standards Board issued a new accounting standard that provides for a comprehensive model to use in the accounting for revenue arising from contracts with customers that will replace most existing revenue recognition guidance in U.S. GAAP. Under this standard, revenue will be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This standard will be effective as of the beginning of the Company’s 2017 fiscal year. The Company is assessing the new standard and has not yet determined the impact to the consolidated financial statements.

 

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Note 3 – Summary of Significant Accounting Policies

   There have been no significant changes in the Company’s accounting policies for the three and nine months ended September 30, 2014 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2013. 

 

Risks and Uncertainties

   The Company has experienced significant losses in the past and has not sustained quarter over quarter profits. The Company is also highly leveraged, with $8.2 million in current bank indebtedness and $83.3 million in current term debt, net of discount, as of September 30, 2014. Both debt instruments mature on March 31, 2015, and as a result are classified as current liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2014. 

   During 2012, the Company and certain of its subsidiaries entered into and subsequently amended the Third Amended and Restated Credit Agreement, dated as of March 22, 2012 (the “Term Loan Agreement”) with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders (collectively the “Term Lenders”), which among other things, reduced the stated interest rate to 10% from 15%, revised the financial covenants and provided for additional borrowings.

   On February 7, 2013, the Company and certain of its subsidiaries entered into a Third Amendment to the Term Loan Agreement (the “Third Amendment”), in which the Term Lenders provided additional borrowings of $4.0 million, in exchange for 1,442,172 shares of common stock pursuant to a Subscription Agreement (the “Subscription Agreement”). Further, the minimum Adjusted EBITDA financial covenant was amended and its application was postponed until the fiscal quarter ending March 31, 2014 (see below for elimination of EBITDA covenant) and the other financial covenants, including the minimum liquidity covenant, are no longer applicable under the Term Loan Agreement. Additionally, the definition of Maturity Date in the Term Loan Agreement was also amended to provide that it shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control (as defined in the Term Loan Agreement). The 2012 and 2013 Term Loan Agreement amendments were determined to be troubled debt restructurings and were taken to improve the Company’s liquidity, leverage and future operating cash flow.

   On March 28, 2014, the Company entered into a Fourth Amendment to the Term Loan Agreement (the “Fourth Amendment”).  Pursuant to the Fourth Amendment, the minimum Adjusted EBITDA financial covenant in the Term Loan Agreement is no longer applicable.   

   On March 28, 2014, the Company entered into a Twenty-Second Amendment (the “Twenty-Second Amendment”) to the Credit Agreement dated March 5, 2008 (as amended, restated, supplemented or otherwise modified from time to time, the “Revolving Credit Agreement”) between Dialogic Corporation, a wholly-owned subsidiary of the Company (“Dialogic Subsidiary”) and Wells Fargo Foothill Canada ULC (“Wells Fargo”). Pursuant to the Twenty-Second Amendment, the Revolving Credit Agreement was amended to change the minimum Adjusted EBITDA financial covenant and postpone its application until the twelve-month period ending on March 31, 2015. The Twenty-Second Amendment also provided that the minimum Adjusted EBITDA will not be tested for the periods ending on March 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014. Under the Twenty-Second Amendment, the minimum Adjusted EBITDA remained at $6.0 million and will be increased by 80% of the pro forma adjustment to Adjusted EBITDA (as set forth in the definition thereof for any applicable Reference Period) concurrently with the closing of each Permitted Acquisition (as defined in the Revolving Credit Agreement). The Revolving Credit Agreement was also amended to increase the “Availability Block” to $1.4 million, increasing by an additional $100,000 on April 1, 2014 and on the first day of each fiscal quarter thereafter. The Company might not be able to maintain as high of a borrowing base under the Revolving Credit Agreement due to the increase in the Availability Block. Also, if the Company’s revenue continues to decline and the corresponding accounts receivable balance declines, this would also reduce the available borrowing base under the Revolving Credit Agreement.       

   As described above, the maturity date for both of the Company’s debt agreements is March 31, 2015. As of September 30, 2014, the Company classified its debt under the Term Loan Agreement as current on the accompanying condensed consolidated balance sheet, since the Term Loan Agreement had not been extended as of that date.

   The Company expects that all outstanding debt under the Term Loan Agreement will be cancelled and extinguished upon the consummation of the transactions contemplated by the Merger Agreement, and anticipates that all outstanding debt under the Revolving Credit Agreement will be refinanced prior to its maturity date of March 31, 2015. For more information about the Merger Agreement, Commitment Letter and related transactions, see Note 13, “Subsequent Events.” However, if the transactions contemplated by the Merger Agreement and the Commitment Letter do not occur as anticipated, the Company will be required to

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pursue alternative funding arrangements, including but not limited to extending or restructuring both debt agreements, as the Company does not in such event anticipate having sufficient cash and cash equivalents to repay the debt at the maturity of these agreements on March 31, 2015, or if the maturity dates were accelerated. If the transactions contemplated by the Merger Agreement and the Commitment Letter do not occur as anticipated and there is an acceleration of the maturity of the outstanding debt, or if the agreements are not extended or restructured prior to March 31, 2015, the lenders under such debt agreements could seek to foreclose on the Company’s assets, as a result of which the Company would likely need to seek protection under the provisions of the U.S. Bankruptcy Code and/or its affiliates might be required to seek protection under the provisions of applicable bankruptcy codes in other jurisdictions.

   Based on the Company’s current plans, including the proposed Merger Agreement and business conditions, including the restructuring actions that were taken at the end of 2013 and additional cost-cutting measures that the Company has employed and expects to continue to employ during 2014, it believes that its existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy its anticipated cash requirements through the end of 2014. If the transactions contemplated by the Merger Agreement and the Commitment Letter do not occur, and the Company’s outstanding debt is not thereafter restructured or refinanced, then the Company will not have the ability to repay its debt when due and there would be substantial doubt that the Company could continue as a going concern.  

Use of Estimates

   The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from these estimates.

   Significant estimates and judgments relied upon by management in preparation of these consolidated financial statements include revenue recognition, allowances for doubtful accounts, reserves for sales returns and allowances, reserves for excess and obsolete inventory, warranty obligations, valuation of deferred tax assets, stock-based compensation, income tax uncertainties, valuation of goodwill and intangible assets, useful lives of long-lived assets and the fair value of warrants.

   The consolidated financial statements included in this Form 10-Q include estimates based on currently available information and management’s judgment as to the outcome of future conditions and circumstances. Changes in the status of certain facts or circumstances could result in material changes in the estimates used in the preparation of the condensed consolidated financial statements, and actual results could differ from the estimates and assumptions. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, emerging markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

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Fair Value Measurements

   Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The inputs used to measure fair value are as follows:

 

 

The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of their generally short maturities. For cash equivalents, the estimated fair values are based on market prices. The fair value of the Revolving Credit Agreement approximates the carrying amount since interest is based on market based variable rates. The fair value of the Company’s current term debt is estimated by discounting the future cash flows for such instruments at rates currently offered to the Company for similar debt instruments of comparable maturities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. The following table sets forth the Company’s financial liabilities that were measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

 

 

 

 

The Company measured its warrants at fair value on a recurring basis and has determined that these financial liabilities are classified as level 2 instruments in the fair value hierarchy. The following table sets forth the Company’s warrant liability that was measured at fair value as of September 30, 2014 and December 31, 2013 using the Black-Scholes method of valuation using the following assumptions.

 

 

 

Concentrations and Credit Risk

   As of September 30, 2014 and December 31, 2013, accounts receivable aggregating approximately $18.2 million and $22.3 million were insured for credit risk, which are amounts that represent total insured accounts receivable less an average co-insurance amount of 10%, subject to the terms of the insurance agreement. Under the terms of the insurance agreement, the Company is required to pay a premium equal to 0.13% of consolidated revenue.

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   No customers accounted for over 10% of the Company’s revenue for the three and nine months ended September 30, 2014 and 2013, respectively. No customer accounted for more than 10% of accounts receivable as of September 30, 2014 and December 31, 2013.  

 

Note 4 – Select Balance Sheet Information

Inventory

   Inventory is stated at the lower of cost, determined on a first in, first out basis, or market, and consists primarily of raw material and components; work in process and finished products. The following table sets forth the components of inventory as of September 30, 2014 and December 31, 2013:  

 

 

 

Property and Equipment 

   Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives. The following table sets forth the components of property and equipment, net as of September 30, 2014 and December 31, 2013:

 

 

    Depreciation expense was $0.6 million and $0.8 million for the three months ended September 30, 2014 and 2013, respectively and $1.9 million and $2.5 million for the nine months ended September 30, 2014 and 2013, respectively. 

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Goodwill and Intangible Assets

   As of September 30, 2014 and December 31, 2013, goodwill was $8.3 million. Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. The Company is required to perform a test for impairment of goodwill and indefinite-lived intangible assets on an annual basis or more frequently if impairment indicators arise during the year.

   The Company performed a Step 1 impairment test as of September 30, 2014 based on the recently announced Merger Agreement and concluded that no impairment existed.

   The following sets forth a summary of intangible assets as of September 30, 2014 and December 31, 2013:

 

 

 

 

   Amortization expense was $1.3 million and $1.5 million for the three months ended September 30, 2014 and 2013, respectively and $3.8 million and $4.4 million for the nine months ended September 30, 2014 and 2013, respectively.  

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Accrued Liabilities

   The following table summarizes the Company’s accrued liabilities as of September 30, 2014 and December 31, 2013.  

 

 

 

 

 

 

 

 

 

Note 5 – Bank Indebtedness

   The Company has a working capital facility, the Revolving Credit Agreement with Wells Fargo. As of September 30, 2014, the borrowing base under the Revolving Credit Agreement amounted to $13.3 million, the Company had outstanding borrowings of $8.2 million based on the prior month’s borrowing base calculation, and the unused line of credit totaled $16.8 million, of which $5.1 million was available for additional borrowings in the first week of October 2014. As of December 31, 2013, the borrowing base under the Revolving Credit Agreement amounted to $15.2 million, the Company had outstanding borrowings of $12.1 million based on the prior month’s borrowing base calculation, and the unused line of credit totaled $12.9 million, of which $3.1 million was available for additional borrowings in the first week of January 2014. 

On March 28, 2014, the Company entered into a Twenty-Second Amendment to the Revolving Credit Agreement. See Note 3, “Summary of Significant Accounting Policies – Risks and Uncertainties” for more information.    

   The following describes certain terms of the Revolving Credit Agreement, as amended (as of September 30, 2014):

Term. The commitment of the Revolving Credit Lender to make revolving credit loans terminates and all outstanding revolving credit loans are due on the maturity date, which is defined as the earlier of (i) March 31, 2015 or (ii) maturity of the Indebtedness (by acceleration or otherwise) under the Term Loan Agreement. The Company may repay the facility at its own option with 30 days’ notice to the Revolving Credit Lender.

Mandatory Prepayments. The Company is required to prepay revolving credit loans in an amount equal to 100% of the net proceeds from the sale or other disposition of inventory other than in the ordinary course of business, subject to the right to apply the net proceeds to the acquisition of replacement property in lieu of prepayment.

Interest Rates and Fees. At the Company’s election, revolving credit loans may bear interest at a rate equal to the prime rate plus 1.5% or at a rate equal to reserve-adjusted LIBOR plus 3%. Upon the occurrence and continuance of an event of default and at the election of the Revolving Credit Lender, the revolving credit loans will bear interest at a default rate equal to the applicable interest rate or rates plus 2%. The Company pays the Revolving Credit Lender a monthly fee on the unused portion of the maximum revolver amount, as well as a monthly collateral management fee and an annual deferred closing fee.

Interest expense related to the Revolving Credit Agreement for the three months ended September 30, 2014 and 2013 was $0.1 million and for the nine months ended September 30, 2014 and 2013 was $0.3 million and $0.4 million, respectively. The average interest rate for the three and nine months ended September 30, 2014 and 2013 was 4.75%. 

Guarantors. The revolving credit loans were entered into by the Company’s subsidiary Dialogic Corporation and are guaranteed by the Company, Dialogic (US) Inc., Cantata Technology, Inc., Dialogic Distribution Ltd., Dialogic Networks (Israel) Ltd. and Dialogic do Brasil Comercio de Equipamentos Para Telecomunicacao Ltda. (collectively the “Revolving Credit Guarantors”).

Security. The revolving credit loans are secured by a pledge of the assets of the Company and the Revolving Credit Guarantors consisting of accounts receivable and inventory and related property. The security interest of the Revolving Credit Lender is prior to the security interest of the Term Lenders in these assets, subject to the terms and conditions of an intercreditor agreement.

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Minimum Adjusted EBITDA.  Minimum Adjusted EBITDA is defined as earnings in accordance with U.S. GAAP plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments. The Company must also maintain Minimum Adjusted EBITDA of at least $6.0 million for the twelve month period ending on March 31, 2015.

Other Terms. The Company and its subsidiaries are subject to affirmative and negative covenants, including restrictions on incurring additional debt, granting liens, entering into mergers, consolidations and similar transactions, selling assets, prepaying indebtedness, paying dividends or making other distributions on its capital stock, entering into transactions with affiliates and making capital expenditures. The Revolving Credit Agreement contains customary events of default, including a change in control of the Company and an Event of Default (as defined in the Revolving Credit Agreement), which results in a cross-default under the Term Loan Agreement.

   On October 10, 2014, Dialogic Subsidiary and Wells Fargo entered into a Commitment Letter (defined below in Note 13, “Subsequent Events”) under which Wells Fargo agreed to, (1) to consent to the Offer, the Merger, the Merger Agreement, the Exchange Agreement and the transactions contemplated thereby, and (2) to continue to provide financing under the Revolving Credit Facility with a maturity date of March 31, 2015, to an amount not to exceed $13.0 million and otherwise on the terms set forth in the Commitment Letter. The Revolving Credit Facility was reduced to an amount that is consistent with the Company’s collateral pool and current borrowing needs. The Company anticipates that all outstanding debt under the Revolving Credit Agreement will be refinanced prior to its maturity date of March 31, 2015. For more information about the Merger Agreement, Commitment Letter and related transactions, see Note 13, “Subsequent Events.”  

 

Note 6 – Debt and Related Party Transactions 

Tennenbaum Capital Partners, LLC (“Tennenbaum”), a private equity firm, manages the funds of the Term Lenders. Tennenbaum also beneficially owned approximately 55% of the Company’s outstanding common stock as of September 30, 2014. One Managing Partner for Tennenbaum also serves as a member of the Company’s Board of Directors.

In connection with entering into the Term Loan Agreement during 2012, the Company issued to the Term Lenders warrants to purchase 3.6 million shares of common stock with an exercise price of $5.00 per share.  The fair value of the warrants at issuance of $7.1 million reduced the carrying amount of the Term Loan as a debt discount and is accreted to interest expense over the life of the Term Loan. The warrants have been determined to qualify as a liability and, therefore, have been classified as such in the accompanying unaudited condensed consolidated balance sheets. The fair value of the warrants is determined at the end of each reporting period and the change in fair value is recorded as a change in fair value of warrants in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. The fair value of the warrants was $0.7 million and $0.2 million as of September 30, 2014 and December 31, 2013, respectively. The Company recorded a gain of $0.5 million and $0.1 million, respectively, for the three months ended September 30, 2014 and 2013 and a loss of $0.5 million and a gain of $1.4 million for the nine months ended September 30, 2014 and 2013, respectively, to reflect the change in fair value, which is recorded as a component of other income (expense), net in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

On March 28, 2014, the Company entered into a Fourth Amendment to the Term Loan. Pursuant to the Fourth Amendment, the minimum Adjusted EBITDA financial covenant in the Term Loan Agreement is no longer applicable.  

   The following describes certain provisions of the Term Loan Agreement, as amended (as of September 30, 2014):

   Additional Borrowings. The Term Lenders have at their discretion the ability to provide additional loans to the Company up to $10.0 million on the same terms as the Term Loans. As of September 30, 2014, the Company had received $8.5 million under this provision.

   Maturity. The Term Loans are due on March 31, 2015, provided that such date shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control (as defined in the Term Loan Agreement). Due to the fact that the Term Loans are due within one-year, the Company has classified the Term Loans as current in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2014.

   Voluntary and Mandatory Prepayments. The Term Loans may be prepaid, in whole or in part, from time to time, subject to payment of (i) if prepaid prior to the first anniversary of the closing date, a premium of 5%, (ii) if prepaid after the first but prior to the second anniversary of the closing date, a premium of 2% and (iii) if prepaid after the second anniversary of the closing date, no premium is required.

The Company is required to offer to prepay the Term Loans out of the net proceeds of certain asset sales (including asset sales by the Company and its subsidiaries) at 100% of the principal amount of Term Loans prepaid, plus the prepayment premiums described above, subject to the Company’s right to retain proceeds of up to $1.0 million in the aggregate each fiscal year. Subject to the right to retain proceeds of up to $1.5 million in the aggregate in each fiscal year, the Company is also required to prepay the Term Loans out

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of 50% of the net proceeds from certain equity issuances by the Company, plus the prepayment premiums described above, except that no prepayment premium is required to be paid in respect of the first $35.0 million of net proceeds of an issuance by the Company of stock at a price of $6.25 per share or more.

Interest Rates. The Term Loans bear interest, payable quarterly in cash, at a rate per annum of 10%. In 2012 and thereafter, if certain minimum cash requirements are not met, interest may be paid at the rate of 5% in cash with the remaining 5% added to principal and paid-in-kind (“PIK”) interest.  For 2013 and 2014, the Term Lenders agreed to allow the Company to pay the cash interest due as PIK.

Upon the occurrence and continuance of an event of default, the Term Loans will bear interest at a default rate equal to the applicable interest rate plus 2%.

For the three months ended September 30, 2014 and 2013, the Company recorded interest expense of $2.7 million and $2.4 million, respectively, related to the Term Loan Agreement of which $2.2 million and $2.0 million, respectively, related to accrued PIK interest and $0.5 million and $0.4 million, respectively, related to accretion of the debt discount. For the nine months ended September 30, 2014 and 2013, the Company recorded interest expense of $7.8 million and $6.8 million, respectively, related to the Term Loan Agreement of which $6.3 million and $5.6 million, respectively, related to accrued PIK interest and $1.5 million and $1.2 million, respectively, related to accretion of the debt discount. 

Guarantors.  The Term Loans are entered into by Dialogic Subsidiary and are guaranteed by the Company, Dialogic US Inc., Dialogic Distribution Limited, Dialogic Manufacturing Limited, Dialogic Networks (Israel) Ltd., Dialogic do Brasil Comercio de Equipamentos Para Telecomunicacao Ltda. and certain U.S. subsidiaries of the Company (collectively, the “Term Loan Guarantors”).

Security. The Term Loans are secured by a pledge of all of the assets of the Company and the Term Loan Guarantors, including all intellectual property, accounts receivable, inventory and capital stock in the Company’s direct and indirect subsidiaries. The security interest of the Term Lenders in inventory, accounts receivable and related property of Dialogic Subsidiary and the Term Loan Guarantors is subordinated to the security interest of the Revolving Credit Lender in those assets.

Financial Covenants. The Term Loans previously subjected the Company to a Minimum Adjusted EBITDA, defined as earnings in accordance with U.S. GAAP plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments. Pursuant to the Fourth Amendment, the minimum Adjusted EBITDA financial covenant in the Term Loan Agreement is no longer applicable.

Other Terms. The Company and its subsidiaries are subject to various affirmative and negative covenants under the Term Loan Agreement, including restrictions on incurring additional debt and contingent liabilities, granting liens, making investments and acquisitions, paying dividends or making other distributions in respect of its capital stock, selling assets and entering into mergers, consolidations and similar transactions, entering into transactions with affiliates and entering into sale and lease-back transactions. The Term Loan Agreement contains customary events of default, including a change in control of the Company without the Term Lenders consent and an Event of Default (as defined in the Term Loan Agreement), which results in a cross-default under the Revolving Credit Agreement.

The following table summarizes debt with related parties as of September 30, 2014 and December 31, 2013:

 

 

 

   Substantially simultaneously with the execution and delivery of the Merger Agreement, the lenders under the Term Loan Agreement, entered into an Agreement to Exchange, Tender and Sell. For more information about the Merger Agreement, Agreement to Exchange, Tender and Sell, and related transactions, see Note 13, “Subsequent Events.”

 

 

 

Note 7 – Restructuring Charges 

The Company has implemented various initiatives to reduce its overall cost structure, including exiting certain facilities and transitioning work to other locations. Costs incurred in connection with these actions include employee separation costs, including severance, benefits and outplacement and lease termination, cease use and other related facility exit costs.

    During the fourth quarter 2013, the Company approved and initiated a restructuring plan designed to reduce operating costs, so it can focus its resources on a restructured business model. On January 13, 2014, the Company continued the execution of this plan by

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notifying the majority of affected employees or commencing consultation processes with affected employees. The complete execution of the restructuring plan will result in a total workforce reduction of approximately 90 full-time positions, or approximately 16% of the Company’s combined workforce. During the three and nine months ended September 30, 2014, cash payments amounted to $0.6 million and $3.0 million, respectively, for these termination benefits.

    For the three months ended September 30, 2014, the Company recorded an adjustment to the restructuring accrual as a result of the decision to change or delay the termination of certain employees in the amount of $0.9 million. For the nine months ended September 30, 2014, the Company recorded a net benefit of $0.6 million for employee termination benefits, of which $1.0 million related to an adjustment to the restructuring accrual related to employee termination benefits, partially offset by a charge of $0.4 million related to actions in connection with the exit of the Milpitas, California facility. Such charges and credits, net are recorded as a component of restructuring charges, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2013, the Company recorded a charge in the amount of $0.1 million for termination benefits. As of September 30, 2014 and December 31, 2013, $0.6 million and $4.2 million, respectively, remained accrued and unpaid for these termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

    For the three months ended September 30, 2014, the Company recorded a charge of $0.2 million in connection with the exit of the Milpitas, California facility related to agent commissions and moving expenses. For the nine months ended September 30, 2014, the Company recorded a net benefit of $0.03 million in lease and facility exit costs, of which $0.5 million related to the reversal of its cease use liability in connection with the exit of the Milpitas, California facility, partially offset by a charge of $0.47 million for the release of all of its obligations under its operating lease in Milpitas, California, following its assignment of the lease to a third party and agent commission and moving expenses. For the nine months ended September 30, 2013, the Company recorded a benefit in the amount of $2.3 million related to the reversal of its restructuring accrual for the Parsippany, New Jersey location based on new sublease terms. Such charges and credits, net are recorded as a component of restructuring charges, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2014, $0.1 million of lease and facility exit costs were reflected as a component of accrued liabilities and $0.1 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2013, $0.2 million of lease and facility exit costs were reflected as a component of accrued liabilities and $0.5 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. 

  

   The following table sets forth restructuring activity for the quarterly periods ended March 31, 2014, June 30, 2014 and September 30, 2014:

 

 

 

 

 

 

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Note 8 – Stock-Based Compensation

   Stock-based compensation cost is estimated at the grant date based on the award’s fair value. For stock options, fair value is calculated by the Black-Scholes option-pricing model. For restricted stock units (“RSUs”), fair value is determined based on the stock price on the grant date. The Company recognizes the compensation cost of stock-based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The Black-Scholes model requires various judgment-based assumptions including interest rates, expected volatility and expected term. 

   The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period commensurate with the expected term. The computation of expected volatility is based on the historical volatility of the Company’s stock, as well as historical and implied volatility of comparable companies from a representative peer group based on industry and market capitalization data. The expected term represents the period that stock-based awards are expected to be outstanding, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee exercise behavior. The expected term for stock-based awards has been determined using the “simplified” method. The Company will continue to use the simplified method until it has enough historical experience to provide a reasonable estimate of expected term. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore the expected dividend yield is assumed to be zero. Management makes an estimate of expected forfeitures and recognizes compensation expense only for the equity awards expected to vest.

   Under the terms of the Merger Agreement and, as applicable, in accordance with the Company’s equity incentive plans, each option to purchase Shares (defined below), each restricted stock unit and each warrant to purchase Shares, in each case that is outstanding immediately prior to the Effective Time (defined below), whether vested or unvested, will be cancelled as of the Effective Time (defined below) without consideration or other payment to the holders thereof. For more information about the Merger Agreement and related transactions, see Note 13, “Subsequent Events.”

   The following table summarizes stock-based compensation expense by category for the three and nine months ended September 30, 2014 and 2013:  

 

 

Stock Options

  The following table sets forth the summary of stock options activity for the nine months ended September 30, 2014: 

 

 

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   As of September 30, 2014 and December 31, 2013, the weighted-average grant date fair value for stock options outstanding was $9.05 and $10.09, respectively. Stock-based compensation expense related to stock options for the three months ended September 30, 2014 and 2013 was $0.1 million and $0.2 million, respectively, and for the nine months ended September 30, 2014 and 2013 was $0.3 million and $0.6 million, respectively.  The total intrinsic value of options exercised was zero during the three and nine months ended September 30, 2014 and 2013. As of September 30, 2014,  $0.4 million of total unrecognized compensation expense related to non-vested stock options granted to employees and directors is expected to be recognized over a weighted average period of 1.58 years.

   There were no options granted during the nine months ended September 30, 2014. The following weighted average assumptions were used to value options granted during the nine months ended September 30, 2013:  

 

 

Restricted Stock Units

   The following table summarizes restricted stock units outstanding as of September 30, 2014:  

 

 

 

 Stock-based compensation expense related to RSUs for the three months ended September 30, 2014 and 2013 was $0.2 million and $0.3 million, respectively, and for the nine months ended September 30, 2014 and 2013 was $0.6 million and $1.2 million, respectively. During the three and nine months ended September 30, 2014, the aggregate intrinsic value of vested RSUs was  zero and $0.02 million, respectively. As of September 30, 2014,  $0.4 million of total unrecognized compensation expense related to non-vested RSUs granted to employees and directors is expected to be recognized over a weighted average period of 0.63 years.

Employee Stock Purchase Plan

The Company has in effect the 2006 Employee Stock Purchase Plan as amended (“2006 ESPP”) under which, subject to certain limitations, employees may elect to have 1% to 15% of their compensation withheld through payroll deductions to purchase shares of common stock. Employees purchase shares of common stock at a price per share equal to 85% of lesser of the fair market value on the first day of the purchase period or the fair market value on the purchase date at the end of each six-month purchase period. Due to low participation, the Company’s Board of Directors cancelled further offerings under the 2006 ESPP, commencing with the offering which otherwise would have begun on November 15, 2013.

For the three and nine months ended September 30, 2014 and 2013, the total share-based compensation expense related to such purchases amounted to zero. As of September 30, 2014,  59,034 shares have been issued under the 2006 ESPP and 311,178 shares remained available for issuance under the 2006 ESPP.

 

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Note 9 – Net Loss per Share

   Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. The Company has outstanding stock options and restricted stock units, which have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the same.

   Basic and diluted net loss per share was calculated as follows.

 

 

 

 

 

 

 

Note 10 – Commitments and Contingencies 

Leases

   In May 2014, the Company entered into a capital lease arrangement for computer equipment with one lessor. The terms of the capital lease arrangement is for a period of 36 months at an annual interest rate of approximately 7%, and requiring monthly payments of $0.01 million. The amount of the capital lease arrangement included in “Property and Equipment, net” in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2014 was $0.2 million.

Office of the Chief Scientist Grants 

   The Company’s research and development efforts in Israel have been partially financed through grants from that country’s Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor (“OCS”). In return for the OCS’s participation, the Company’s Israeli subsidiary is committed to pay royalties to the Israeli Government at the rate of approximately 3.5% of sales of products in which the Israeli Government has participated in financing the research and development, up to the amounts granted plus interest.

Royalties payable to the OCS are recorded when the related sales are recognized and the associated royalty becomes due and are classified as cost of revenues. Royalty expenses relating to OCS grants included in cost of product revenues for the three months ended September 30, 2014 and 2013 were $0.2 million and for the nine months ended September 30, 2014 and 2013 were $0.6 million.  As of September 30, 2014 and December 31, 2013, the royalty payable amounted to $1.0 million and $1.2 million, respectively. The maximum amount of the contingent liability under these grants potentially due to the Israeli Government (excluding interest) was $15.9 million and $16.7 million as of September 30, 2014 and December 31, 2013, respectively.

Guarantees 

   From time to time, customers require the Company to issue bank guarantees for stated monetary amounts that expire upon achievement of certain agreed objectives, typically customer acceptance of the product, completion of installation and commissioning services, or expiration of the term of the product warranty or maintenance period. Restricted cash represents the collateral securing these guarantee arrangements with banks. 

   As of September 30, 2014 and December 31, 2013, the maximum potential amount of future payments the Company could be required to make under the guarantees amounted to $0.6 million and $1.2 million, respectively. The guarantee term generally varies from three months to thirty years. The guarantees are usually provided for approximately 10% of the contract value.

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Litigation

From time to time, the Company is engaged in various legal proceedings incidental to its normal business activity. The Company’s management believes that the probability of significant losses arising from such lawsuits are remote, but that litigation is inherently uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount in excess of that anticipated by management. Legal costs are expensed as incurred.

As previously reported in the Company’s Form 10-K for the fiscal year ended December 31, 2013, and in prior SEC filings, on March 28, 2011, the Company received a letter from the SEC informing the Company that the SEC was conducting an informal inquiry which was related to allegations of improper revenue recognition and potential violations of the Foreign Corrupt Practices Act of 1977, as amended, by the former Veraz Networks Inc. business during periods prior to completion of the Company’s business combination with Dialogic Subsidiary.  On July 2, 2014, the Company received a notice from the SEC under the guidelines set out in the final paragraph of Securities Act Release Number 5310. The notice advised the Company that the SEC had concluded its investigation and, based on information it had as of July 2, 2014, the SEC did not intend to recommend an enforcement action against the Company.

On or around October 28, 2014, a purported stockholder of the Company filed a putative class action lawsuit in the Superior Court of New Jersey, Morris County, against the Company, its directors, Parent and Sub, captioned Stephen Bushansky v. Dialogic Inc., et al.  The lawsuit alleges that the Company’s directors breached their fiduciary duties to the Company’s stockholders, and that the other defendants aided and abetted those breaches, by seeking to sell the Company through an allegedly unfair process for an unfair price on unfair terms.  The lawsuit seeks, among other things, equitable relief that would enjoin the consummation of the Merger (defined below), rescission of the Merger Agreement (to the extent it already is implemented), and attorneys’ fees and costs.  Additional stockholders of the Company may file additional lawsuits that seek similar relief based on similar allegations. The Company is unable to estimate any possible loss or range of loss at this early stage in the case.

 

Note 11 – Segment and Geographic Information 

   Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company is required to disclose certain information regarding operating segments, products and services, geographic areas of operation and major customers. The Company’s chief operating decision maker is the Company’s Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. Revenue by geographic area is based on the billing address of the customer.

   The following tables set forth revenue and long-lived assets, net by geographic area:

 

 

 

 

 

 

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Note 12 – Income Taxes 

   The Company recorded an income tax provision of $0.2 million and $0.3 million for the three months ended September 30, 2014 and 2013, respectively.  For the three months ended September 30, 2014 and 2013, the Company’s effective tax rate was approximately (198.3)% and (47.5)%, respectively. The Company recorded an income tax provision of $0.4 million and $0.6 million for the nine months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, the Company’s effective tax rate was approximately (5.6)% and (3.5)%, respectively.

   The effective tax rate is significantly different from the statutory rate as the Company is not benefiting from current losses in the U.S. and certain foreign jurisdictions. The tax provision for the three and nine months ended September 30, 2014 and 2013 is primarily due to taxes in profitable foreign jurisdictions and an increase in the unrecognized tax benefits liability.  

     As of September 30, 2014 and December 31, 2013, the Company’s net deferred tax assets were $0.01 million. A valuation allowance is provided to the extent recoverability of the deferred tax asset, or the timing of such recovery, is not “more likely than not”. The need for a valuation allowance is continually reviewed by management. The utilization of tax attributes by the Company is dependent on the generation of taxable income in the principal jurisdictions in which it operates and/or has tax planning strategies. As required, the Company has evaluated and weighted the positive and negative evidence present at each period. In arriving at its conclusion the Company has given significant weight to the history of pretax losses. If circumstances change and management believes a larger or smaller deferred tax asset is justified, the reduction (increase) of the valuation allowance will result in an income tax benefit or (expense).

   The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions.      Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of September 30, 2014 and December 31, 2013, the total liability for unrecognized tax benefits was $2.8 million and $2.7 million, respectively, all of which would impact the annual effective rate, if realized, consistent with the principles of ASC No. 805. Each year the statute of limitations for income tax returns filed in various jurisdictions closes, sometimes without adjustments.

   Utilization of the Company’s net operating loss carry forwards and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code (Section 382) and other similar foreign provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization. As changes in ownership have occurred the Company has not yet determined the full extent of such limitations. The Company expects to determine the amount of net operating loss limitation during the fourth quarter of 2014. 

 

Note 13 – Subsequent Events

Agreement and Plan of Merger

   On October 10, 2014, the Company entered into the Merger Agreement with Parent and Sub. Parent and Sub are affiliates of Novacap TMT, a Canadian private equity firm. The Merger Agreement and the related transactions are described more fully in Current Reports on Form 8-K filed by the Company with the SEC on October 10, 2014 and October 15, 2014.

   Pursuant to the Merger Agreement, on October 24, 2014, Sub commenced a tender offer (the “Offer”) to purchase all of the outstanding shares of the common stock, $0.001 par value per share, of Dialogic (the “Shares”) at a purchase price of $0.15 per Share, net to the seller thereof in cash without interest and less any applicable withholdings (the “Offer Price”). The Offer will remain open for a minimum of 20 business days from commencement, subject to possible extension on the terms set forth in the Merger Agreement. The Offer is currently scheduled to expire at 11:59 p.m., Eastern Time, on November 21, 2014. 

   Pursuant to the Merger Agreement and the Exchange Agreement (as defined below), assuming the transactions contemplated thereby successfully close as currently contemplated, a total of $35.3 million will be paid by entities affiliated with Novacap TMT for all of the Company’s outstanding common stock and all of the outstanding debt currently held by TCP. The total aggregate purchase price of $35.3 million will be paid at closing as follows:

 

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   Pursuant to the Merger Agreement, after the consummation of the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Sub will be merged with and into the Company (the “Merger”) and the separate corporate existence of Sub will cease at that time (the “Effective Time”). In connection with the Merger, shareholders who do not exercise appraisal rights under Delaware law will be entitled to the same $0.15 per Share consideration paid in the Offer. Following the consummation of the Merger, the Company will continue as the surviving corporation and a wholly-owned subsidiary of Parent.  Following the Merger, the Shares will cease to be publicly traded.

   Under the terms of the Merger Agreement and, as applicable, in accordance with the Company’s equity incentive plans, each option to purchase Shares, each restricted stock unit and each warrant to purchase Shares, in each case that is outstanding immediately prior to the Effective Time, whether vested or unvested, will be cancelled as of the Effective Time without consideration or other payment to the holders thereof.

   The Merger Agreement includes customary representations, warranties and covenants of the Company, Parent and Sub. Sub’s obligation to accept for payment and pay for the Shares tendered in the Offer is subject to certain conditions.  Neither the Offer nor the Merger is subject to a financing condition.  Parent plans to finance the transaction with equity financing committed from Novacap TMT pursuant to the terms of an equity commitment letter executed in favor of Parent (the “Equity Commitment Letter”). The Equity Commitment Letter provides that Novacap TMT, on the terms and subject to the conditions set forth therein, has committed to contribute (or cause one or more of its affiliates to contribute) to Parent, at or prior to the closing of the Offer, an aggregate amount in cash equal to $34.2 million, the sum of the amounts required to consummate the Offer, the Merger and the Sale Transaction (defined below).

   The Merger Agreement includes customary termination provisions for both the Company and Parent. If Parent terminates the Merger Agreement under specified circumstances (including, without limitation, if the Company’s Board of Directors changes its recommendation with respect to the Merger Agreement, the Offer, the Merger, the Exchange Agreement Transactions (defined below) or the other transactions contemplated by the Merger Agreement or publicly recommends another proposal to acquire the Company), then the Company will be obligated to pay to Parent an amount equal to the sum of (1) $671,000 plus (2) the aggregate amount of fees and expenses incurred by Novacap TMT, Parent, Sub and their affiliates in connection with the Merger Agreement and the transactions contemplated thereby as of the applicable date that the Merger Agreement is terminated (the “Company Termination Fee”), provided that in no event shall the Company Termination Fee exceed $2.5 million. The Company will also be obligated to pay the Company Termination Fee to Parent if it accepts, or enters into a definitive agreement with respect to, a bona fide written proposal made by a third party after the date of the Merger Agreement pursuant to which such third party would acquire 30% or more of any class of equity interests (by vote or by value) or the assets of the Company and its subsidiaries, taken as a whole, on terms that the independent special committee of the Company’s Board of Directors (the “Special Committee”) determines in good faith, after consultation with its financial advisor and outside legal counsel, and after taking into consideration, among other things, all of the terms, conditions and legal, financial, regulatory and other aspects of such proposal and the Merger Agreement (in each case taking into account any revisions to the Merger Agreement made or proposed in writing by Parent prior to the time of determination), is reasonably likely to be consummated in accordance with its terms and would result in a transaction that is more favorable to the holders of Shares from a financial point of view than the Offer or the Merger and the other transactions contemplated by the Merger Agreement (after taking into account the expected timing and risk and likelihood of consummation).  In the event of a termination of the Merger Agreement under either scenario described directly above, the Company must pay the Company Termination Fee as follows: a portion of the Company Termination Fee equal to $0.5 million in cash must be paid to Parent within two business days after the date of Parent’s termination of the Merger Agreement or concurrently with the Company’s termination of the Merger Agreement, as applicable, with the remainder of the Company Termination Fee due in the form of a promissory note, subject to the terms and conditions described in the Merger Agreement (the “Break Fee Note”).

Agreement to Exchange, Tender and Sell

   Substantially simultaneously with the execution and delivery of the Merger Agreement, Parent, Sub, the Company, Dialogic Subsidiary, Obsidian, LLC (“Obsidian”), as agent under the Term Loan Agreement , and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC and Tennenbaum Opportunities Partners V, LP (collectively the “Tennenbaum Funds”), as lenders under the Term Loan Agreement, entered into an Agreement to Exchange, Tender and Sell (the “Exchange Agreement”), pursuant to which the Tennenbaum Funds agreed, on the terms and subject to the conditions set forth in the Exchange Agreement:

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   As of October 10, 2014, the Tennenbaum Funds held (1) loans in the aggregate principal amount of $87.0 million (such loans, together with all accrued and unpaid interest with respect thereto, the “Term Loans”) under the Term Loan Agreement and (2) an aggregate of 8.9 million Shares, representing 55.0% of total Shares outstanding. The Company expects that all outstanding debt under the Term Loan Agreement will be cancelled and extinguished upon the consummation of the transactions contemplated by the Merger Agreement.

Tender and Support Agreements

   Substantially simultaneously with the execution and delivery of the Merger Agreement, each of  Investcorp International Inc. and Eicon Dialogic Investment SRL, which collectively own 8.6% of the outstanding Shares as of October 10, 2014, as well as each of the Tennenbaum Funds, has separately entered into a Tender and Support Agreement (each a “Support Agreement”) with Parent and Sub, providing that they shall, among other things, agree to tender all of their Shares in the Offer (subject to certain exceptions set forth in the Support Agreements) and to cause their Shares to be voted, at any meeting of the stockholders of the Company, however called, and in any action by written consent of the stockholder of the Company, in favor of, among other things, the Merger, the execution and delivery by the Company of the Merger Agreement, the adoption and approval of the Merger Agreement and the terms thereof, and the transactions contemplated by the Merger Agreement (subject to certain exceptions set forth in the Support Agreements).

Limited Guarantee

   Substantially simultaneously with the execution and delivery of the Merger Agreement, Novacap TMT entered into a Limited Guarantee with the Company and the Tennenbaum Funds (the “Limited Guarantee”) pursuant to which Novacap TMT has agreed to guarantee to the Company and the Tennenbaum Funds, on the terms and subject to the conditions set forth in the Limited Guarantee, the due and punctual payment in full in cash of all of the payment obligations of Parent and its affiliates (including Sub) under the Merger Agreement and the Exchange Agreement, in each case when required to be paid by Parent or its affiliates pursuant to and in accordance with the Merger Agreement and/or the Exchange Agreement, up to a maximum aggregate amount of $34.2 million.

Commitment Letter for $13 Million Senior Secured Credit Facility; Amendment to Revolving Credit Agreement

   On October 10, 2014, Dialogic Subsidiary and Wells Fargo entered into a commitment letter (the “Commitment Letter”) under which Wells Fargo agreed, in its capacity as agent under the Revolving Credit Agreement, to commit, subject to the terms and conditions of the Commitment Letter, (1) to consent to the Offer, the Merger, the Merger Agreement, the Exchange Agreement and the transactions contemplated thereby (including the related change of control), which would otherwise result in events of default under the Revolving Credit Agreement, and (2) to continue to provide financing under the Revolving Credit Facility with a maturity date of March 31, 2015, to an amount not to exceed $13.0 million and otherwise on the terms set forth in the Commitment Letter. The Revolving Credit Facility was reduced to an amount that is consistent with the Company’s collateral pool and current borrowing needs. The Company anticipates that all outstanding debt under the Revolving Credit Agreement will be refinanced prior to its maturity date of March 31, 2015.  

   Concurrently with the execution and delivery of the Commitment Letter, Dialogic Subsidiary, the Company and Wells Fargo entered into a Twenty-Third Amendment to the Revolving Credit Agreement pursuant to which the Revolving Credit Agreement was amended, among other things, (1) to set the “Availability Block” at $1.75 million, which amount will reduce the “Borrowing Base” under the Revolving Credit Agreement at all times, and (2) to set the “Maximum Revolver Amount” at $13.0 million (or $12.0 million on and at all times after January 1, 2015). Subject to the terms and conditions of the Revolving Credit Agreement, the lenders thereunder have agreed to advance funds to Dialogic Subsidiary in an amount at any time outstanding not to exceed the lesser of the Maximum Revolver Amount and the Borrowing Base (in each case less the amount subject to letters of credit then outstanding under the Revolving Credit Agreement).