0001185185-13-001848.txt : 20130816 0001185185-13-001848.hdr.sgml : 20130816 20130816151712 ACCESSION NUMBER: 0001185185-13-001848 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20130630 FILED AS OF DATE: 20130816 DATE AS OF CHANGE: 20130816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Telanetix,Inc CENTRAL INDEX KEY: 0001277270 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 770622733 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-51995 FILM NUMBER: 131045085 BUSINESS ADDRESS: STREET 1: 11201 SE 8TH STREET STREET 2: SUITE 200 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: (206) 621-3500 MAIL ADDRESS: STREET 1: 11201 SE 8TH STREET STREET 2: SUITE 200 CITY: BELLEVUE STATE: WA ZIP: 98004 FORMER COMPANY: FORMER CONFORMED NAME: AER VENTURES INC DATE OF NAME CHANGE: 20040122 10-Q 1 telanetix10q063013.htm telanetix10q063013.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
 

 
FORM 10-Q 
 

 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2013

or

o
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 000-51995

TELANETIX, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
77-0622733
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
11201 SE 8th Street, Suite 200
Bellevue, Washington
 
98004
(Address of principal executive offices)
 
(Zip Code)

(206) 621-3500
(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 o

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 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 the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x

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

As of August 16, 2013, 5,138,900 shares (post reverse stock split) of the issuer's common stock, par value $0.0001 per share, were outstanding.  The common stock is the issuer's only class of stock currently outstanding.
 
 
Telanetix, Inc.
 
Quarterly Report on Form 10-Q
 
For the Six Months Ended June 30, 2013
 
TABLE OF CONTENTS
 
 
 
 
In this report, unless the context indicates otherwise, the terms "Telanetix," "Company," "we," "us," and "our" refer to Telanetix, Inc., a Delaware corporation, and its wholly-owned subsidiaries.
 
FORWARD LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the "Securities Act," and Section 21E of the Securities Exchange Act of 1934 or the "Exchange Act."  In some cases, you can identify forward looking statements by terms such as "may," "intend," "might," "will," "should," "could," "would," "expect," "believe," "anticipate," "estimate," "predict," "potential," or the negative of these terms.  These terms and similar expressions are intended to identify forward-looking statements.  Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected, including those set forth under the heading "Risk Factors" and elsewhere in, or incorporated by reference into, this report.
 
The forward-looking statements in this report are based upon management's current expectations, which management believes are reasonable.  We cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are unaware of, may cause actual results to differ materially from those contained in any forward-looking statements.  You are cautioned not to place undue reliance on any forward-looking statements.  These statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q.  Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including:

 
·  
new competitors and new technologies may further increase competition;
 
·  
our operating costs may increase beyond our current expectations and we may be unable to fully implement our current business plan;
 
·  
our ability to obtain future financing or funds when needed;
 
·  
our ability to successfully obtain a diverse customer base;
 
·  
our ability to protect our intellectual property through patents, trademarks, copyrights and confidentiality agreements;
 
·  
our ability to attract and retain a qualified employee base;
 
·  
our ability to respond to new developments in technology and new applications of existing technology before our competitors;
 
·  
acquisitions, business combinations, strategic partnerships, divestures, and other significant transactions may involve additional uncertainties; and
 
·  
our ability to maintain and execute a successful business strategy.     
                                                                                              
You should consider carefully the statements under "Item 1A. Risk Factors" in Part II of this report and other sections of this report, which address factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.
 
 
PART I--FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
 
TELANETIX, INC.
Condensed Consolidated Balance Sheets
 
   
June 30, 2013
(unaudited)
   
December 31, 2012
 
ASSETS
               
Current assets
               
Cash
 
$
2,100,270
   
$
1,184,143
 
Accounts receivable, net
   
2,677,814
     
1,679,290
 
Inventory
   
38,627
     
29,935
 
Prepaid expenses and other current assets
   
867,742
     
1,061,086
 
        Total current assets
   
5,684,453
     
3,954,454
 
Property and equipment, net
   
1,203,613
     
1,111,314
 
Goodwill
   
7,044,864
     
7,044,864
 
Purchased intangibles, net
   
6,818,337
     
7,198,337
 
Restricted cash
   
1,026,402
     
1,025,000
 
Other assets
   
219,240
     
188,436
 
        Total assets
 
$
21,996,909
   
 $
20,522,405
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities
               
Accounts payable
 
$
2,438,519
   
 $
1,786,610
 
Accrued liabilities
   
2,838,161
     
2,613,957
 
Deferred revenue
   
1,029,051
     
1,145,983
 
Current portion of capital lease obligations
   
965,053
     
769,717
 
Current portion of long-term debt
   
1,500,000
     
1,500,000
 
        Total current liabilities
   
8,770,784
     
7,816,267
 
Non-current liabilities
               
Deferred revenue, net of current portion
   
393,470
     
167,454
 
Capital lease obligations, net of current portion
   
1,196,841
     
1,184,749
 
Long-term accounts payable
   
6,228
     
14,532
 
Long-term debt, net of current portion
   
7,376,660
     
7,726,660
 
        Total non-current liabilities
   
8,973,199
     
   9,093,395
 
        Total liabilities
   
17,743,983
     
16,909,662
 
Stockholders' equity (deficit)
               
Common stock, $.0001 par value; Authorized: 8,000,000 shares;
  Issued and outstanding 5,138,900 at June 30, 2013 and 5,120,102 at December 31, 2012
     
514
       
512
 
Additional paid in capital
   
45,177,339
     
45,109,244
 
Warrants
   
     
56,953
 
Accumulated deficit
   
(40,924,927
)
   
  (41,553,966
)
        Total stockholders' equity
   
4,252,926
     
3,612,743
 
        Total liabilities and stockholders' equity
 
$
21,996,909
   
$
20,522,405
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
 TELANETIX, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenues
 
$
9,081,561
   
$
7,861,644
   
$
17,739,624
   
$
15,681,668
 
                                 
Cost of revenues
   
3,429,668
     
3,311,487
     
6,588,564
     
6,479,434
 
                                 
Gross profit
   
5,651,893
     
4,550,157
     
11,151,060
     
9,202,234
 
                                 
Operating expenses
                               
Selling and marketing
   
1,975,631
     
1,625,866
     
3,908,611
     
3,351,190
 
General and administrative
   
1,804,237
     
1,817,640
     
4,645,834
     
3,753,903
 
Research, development and engineering
   
449,941
     
507,205
     
905,414
     
977,015
 
Depreciation
   
153,457
     
155,160
     
300,651
     
317,166
 
Amortization of purchased intangibles
   
190,000
     
550,000
     
380,000
     
1,100,000
 
Total operating expenses
   
4,573,266
     
4,655,871
     
10,140,510
     
9,499,274
 
                                 
Operating income (loss)
   
1,078,627
     
(105,714
)
   
1,010,550
     
(297,040
)
                                 
Other income (expense)
                               
Interest income
   
775
     
25
     
1,414
     
58
 
Interest expense
   
(163,754
)
   
(647,292
)
   
(321,056
)
   
(1,307,082
)
Total other income (expense)
   
(162,979
)
   
(647,267
)
   
(319,642
)
   
(1,307,024
)
                                 
Income (loss) from continuing operations before taxes
   
915,648
     
(752,981
)
   
690,908
     
(1,604,064
)
                                 
Income tax (expense)
   
(46,175
)
   
(49,200
)
   
(61,869
)
   
(56,674
)
                                 
                                 
Net income (loss)
 
$
869,473
   
$
(802,181
)
 
$
629,039
   
$
(1,660,738
)
                                 
Net (loss) per share – basic and diluted
                               
Net (loss) per share
 
$
0.17
   
$
(0.17
)
 
$
0.12
   
$
(0.34
)
                                 
Weighted average shares outstanding – basic and diluted
   
5,137,790
     
4,820,098
     
5,128,995
     
4,820,098
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
TELANETIX, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
Net income (loss)
 
$
629,039
   
$
(1,660,738
)
Adjustments to reconcile net loss to cash provided by operating activities:
               
Provision for doubtful accounts
   
(50,809
)
   
18,129
 
Depreciation
   
1,184,742
     
1,263,263
 
(Gain) loss on disposal of fixed assets
           
(3,360
)
Amortization of deferred financing costs
   
-
     
19,116
 
Amortization of intangible assets
   
380,000
     
1,100,000
 
Stock based compensation
   
10,125
     
204,373
 
Amortization of note discounts
   
-
     
843,685
 
Non-cash interest expense
   
-
     
112,505
 
Changes in assets and liabilities:
               
Accounts receivable
   
(947,715
)
   
116,949
 
Inventory
   
(8,692
)
   
60,942
 
Prepaid expenses and other assets
   
(88,132
)
   
(41,420
)
Accounts payable and accrued expenses
   
867,808
     
143,723
 
Deferred revenue
   
109,084
     
(30,537
)
Net cash provided by operating activities
   
2,085,450
     
2,146,630
 
                 
Cash flows from investing activities:
               
Purchase of property and equipment
   
(374,213
)
   
(234,618
)
Proceeds from disposal of fixed assets
   
-
     
3,620
 
Net cash used by investing activities
   
(374,213
)
   
(230,998
)
                 
Cash flows from financing activities:
               
Payments on capital leases
   
(446,130
)
   
(249,943
)
Proceeds from credit facility
   
400,000
     
-
 
Proceeds from exercise of options and warrants
   
    1,020
     
         -
 
Payments on senior secured financing
   
(750,000
)
   
(1,200,000
)
Net cash used by financing activities
   
(795,110
)
   
(1,449,943
)
                 
Net increase (decrease) in cash
   
916,127
     
465,689
 
Cash at beginning of the period
   
1,184,143
     
1,840,265
 
Cash at end of the period
 
$
2,100,270
   
$
2,305,954
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for income taxes
 
$
61,869
   
$
56,674
 
Interest paid
   
100,028
     
332,174
 
Non-cash investing and financing activities:
               
Property and equipment acquired through capital leases
 
$
169,990
   
$
229,099
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
TELANETIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.   Description of Business

We are a cloud based IP voice services company.  Our company is built on the belief that business telecommunication need not be expensive or complicated.  Through our AccessLine-branded Voice Services, we provide customers with a range of business phone services and applications that are easy to purchase, easy to install, easy to use and most importantly provide significant savings.  Our customers have the ability to easily configure their service to meet the unique needs of their business.  At the core of our cloud based, hosted service is our proprietary software, which is developed internally and runs on standard commercial grade servers.  By delivering business phone service to the market in this manner, our Voice Services offer flexibility and ease of use to any sized business customer, at an affordable price point.
 
AccessLine offers the following cloud based, hosted Voice over IP services: Digital Phone System (DPS), SIP Trunking Service and a la carte, individual phone services.  DPS replaces a customer's existing telephone lines and phone system with a Voice over IP alternative. It is sold as a complete turn-key solution where we bundle business-class phone equipment which is manufactured by third parties, along with our reliable voice network services.  This service is primarily targeted at small businesses looking for a fully integrated solution that does not require expert assistance to install or manage.  SIP Trunking Service replaces high-cost telephone lines with a low cost yet high quality IP alternative.  SIP Trunking is for larger businesses that already have their own on premise equipment (PBX) and is targeted at those businesses with large calling volumes looking for cost effective alternatives to traditional carrier offerings. SIP Trunking Service can support businesses with hundreds to thousands of employees.
 
AccessLine-branded services also offer a la carte phone services and features including conferencing calling services, find-me and follow-me services, toll-free services, and automated attendant service.  Each a la carte service can be purchased individually through AccessLine’s various websites.  All services include easy-to-use web interfaces for simple management and customizations.
 
Our revenues principally consist of: monthly recurring fees, activation, and usage fees from the communication services and the solutions outlined above. There are some ancillary one time equipment charges associated with our DPS solution.

2. Basis of Presentation
 
The accompanying unaudited financial statements, consisting of the consolidated balance sheet as of June 30, 2013, the consolidated statements of operations for the six months ended June 30, 2013 and 2012, and the consolidated statements of cash flows for the three and six months ended June 30, 2013 and 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense; the valuation of conversion features; and other contingencies.  Management evaluates these estimates on an on-going basis.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions. Operating results for the six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2013.
 
 
Liquidity:

At June 30, 2013, we had cash of $2.1 million, accounts receivable of $2.7 million and a working capital deficit of $3.0 million. However, current liabilities include certain items that will likely settle without future cash payments or otherwise not require significant expenditures by the Company including: deferred revenue of $1.0 million (primarily deferred up front customer activation fees) and accrued vacation of $0.6 million. The aforementioned items represent $1.6 million of total current liabilities as of June 30, 2013. We do not anticipate being in a positive working capital position in the near future.  

However, based on our projected 2013 results and, if necessary, our ability to reduce certain variable operating expenses, we believe that our existing capital, together with anticipated cash flows from operations, will be sufficient to finance our operations through at least July 1, 2014.

If our cash reserves prove insufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other equity or debt securities.  However, there are no commitments or arrangements for future financings in place at this time, and we can give no assurance that such capital will be available on favorable terms or at all.  We may need additional financing thereafter until we can achieve profitability.  If we cannot, we will be forced to curtail our operations or possibly be forced to evaluate a sale or liquidation of our assets.  Any future financing may involve substantial dilution to existing investors.
 
Our loan with East West Bank is secured by a lien on all of our assets, and the terms of such notes restrict our ability to borrow funds, pledge our assets as security for any such borrowing or raise additional capital by selling shares of capital stock or other equity or debt securities, without their consent.

In December of 2012, we refinanced the balance of our term debt in connection with our “2010 notes”. The Loan Agreement provided the Company a term loan in the principal amount of $7,500,000 with principal and interest payable on a monthly basis over four years subject to the terms of a Promissory Note by the Company in favor of East West Bank (the "East West Note"). In connection with the East West Note, we entered into a revolving line of credit of up to $1M based on the Company’s eligible accounts receivable.
 
On April 11, 2013, Telanetix, Inc., a Delaware corporation (“Telanetix”), entered into a Second Amendment to Loan and Security Agreement (the “Second Amendment”) by and among itself, its direct and indirect subsidiaries (together with Telanetix, the “Borrowers”), and East West Bank (“East West”), which amended that certain Loan and Security Agreement, dated as of December 14, 2012, by and among the Borrowers and East West, as amended by that certain Amendment to Loan and Security Agreement dated as of January 16, 2013 (the “Loan Agreement”).

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

In addition, the Second Amendment provides that, beginning on December 1 of each year starting with 2013, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days.

There was $0.4 million outstanding under the Line of Credit as of June 30, 2013.

3. Recapitalization
 
Debenture Repurchase
 
On June 30, 2010, the Company entered into a securities purchase agreement with the holders of its outstanding debentures in the principal amount of $29.6 million. Under the terms of the agreement, the Company repurchased all of its outstanding debentures in exchange for payment of $7.5 million in cash, the holders of the Company's debentures exchanged all outstanding warrants they held for shares of the Company's common stock, and the Company issued to such holders an additional number of shares of common stock such that the holders collectively beneficially owned approximately 221,333 shares of common stock immediately following the completion of the transactions contemplated by the agreement. The Company paid the $7.5 million from the proceeds of its senior secured note private placement described below.
 
 
After giving effect to the transactions contemplated by the debenture repurchase described above and the transactions contemplated by the senior secured note private placement described below, the Company had $10.5 million of senior secured notes outstanding and all of its previously issued debentures, which had a principal amount of $29.6 million, were cancelled.
 
Senior Secured Note Private Placement
 
On June 30, 2010, the Company entered into a securities purchase agreement (the "Hale Securities Purchase Agreement") with affiliates of Hale Capital Management, LP (collectively, "Hale"), pursuant to which in exchange for $10.5 million, the Company issued to Hale $10.5 million of senior secured notes (the "2010 Notes"), and 3,833,356 shares of its common stock.  The carrying value assigned to the debt and equity was based on the relative fair value of each component as determined by a third party valuation specialist.  The allocation between debt and equity resulted in a $5.7 million debt discount which was to be amortized over the term of the 2010 Notes using the effective interest method.  A summary of the material terms of the 2010 Notes is set forth in Note 4—2010 Notes, below.
 
Under the terms of the Hale Securities Purchase Agreement, the Company agreed to conduct a rights offering.  In connection with the rights offering, depending on the amount of capital it raised, the Company and Hale agreed that the Company would either redeem up to $3.0 million of principal of the 2010 Notes or that Hale would exchange up to $3.0 million of principal of the 2010 Notes for shares of the Company's common stock.  As discussed below the Company has cancelled the rights offering and no longer has any obligation to conduct the same.
 
In August 2011, the independent directors of the Company approved, and the Company and Hale entered into a settlement agreement, pursuant to which (1) Hale released the Company from any obligation to conduct the rights offering, and (2) the Company released Hale from its "backstop" obligation to convert up to $3.0 million of the 2010 Notes into common stock.  As a result of the amendment, the original principal amount of the 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through December 31, 2012.  In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million of principal (plus associated “PIK Interest”) through June 30, 2012 and to have any such amounts added to principal.  On December 14, 2012 the senior secured notes were paid in full.
 
The Company agreed to a number of provisions in the Hale Securities Purchase Agreement that protect Hale's investment, including:
 
Most Favored Nation.  For so long as the 2010 Notes were outstanding and until Hale ceased to own at least ten percent of the Company's outstanding common stock, if the Company (i) issued debt on terms that are more favorable than the terms of the 2010 Notes, or (ii) issued common stock, preferred stock, equivalents or any other equity security on terms more favorable than those set out in the Hale Securities Purchase Agreement, then the terms of the 2010 Notes and/or the Hale Securities Purchase Agreement would have automatically become amended such that Hale would have received the benefit of the more favorable terms.
 
Right of First Refusal.  For so long as the 2010 Notes were outstanding and until Hale ceased to own at least ten percent of the Company's outstanding common stock, Hale had a right of first refusal on any subsequent placement that the Company were to make of common stock or common stock equivalents or any securities convertible into or exchangeable or exercisable for shares of its common stock.
 
Fundamental Transactions.  For so long as the 2010 Notes were outstanding, and thereafter for as long as any of the Hale purchasers continued to own at least twenty percent of the common stock that they purchased under the Hale Securities Purchase Agreement, the Company could not effect a transaction in which it consolidated or merged with another entity, conveyed all or substantially all of its assets, permitted another person or group to acquire more than fifty percent of its voting stock, or reorganized or reclassified its common stock without the majority consent of Hale.  Additionally, the Company could not have effected such a transaction without obtaining the foregoing requisite consent if such transaction would have triggered the most favored nation provision in the Hale Securities Purchase Agreement described above or if such transaction would otherwise involved the issuance of any equity securities or the incurrence of debt at a price that would have been less than the price paid in connection with the transaction consummated pursuant under the Hale Securities Purchase Agreement.
 
In December of 2012, the 2010 Notes were fully paid and discharged.
 
 
Post-Closing Adjustment Shares.  If at any time prior to July 2, 2012, the Company were required to make payment on certain identified contingent liabilities up to an aggregate amount of $464,831, then it would have been obligated to issue additional shares of common stock to Hale, such that the total percentage ownership of its fully diluted common stock immediately after the payment of such liabilities would equal the same percentage ownership that Hale would have had if the contingent payable had been paid prior to the closing under the Hale Securities Purchase Agreement.  To date $464,831 of these contingent liabilities have been incurred as expenses.  Accordingly, in April of 2011 we issued to Hale an additional 225,576 shares of our common stock under the terms of the Hale Securities Purchase Agreement.  As anticipated in our quarterly report on Form 10-Q for the quarter ended September 30, 2012, on November 16, 2012 we issued Hale the remaining 300,004 shares of common stock as final settlement of the contingent liabilities.

Registration Rights Agreement
 
In connection with the Hale Securities Purchase Agreement, the Company entered into a registration rights agreement with Hale pursuant to which the Company agreed to file a registration statement with the SEC for the resale of the shares issued and issuable to Hale under the Hale Securities Purchase Agreement.  The Company filed the registration statement with the SEC on September 30, 2010. The registration rights agreement contained penalty provisions in the event that the Company failed to secure the effectiveness of the registration statement by November 29, 2010, or failed to file other registration statements the Company is required to file under the terms of the registration rights agreement in a timely manner, or if the Company failed to maintain the effectiveness of any registration statement it was required to file under the terms of the registration rights agreement until the shares issued to Hale had been sold or could have been sold under Rule 144 without restriction or limitation (including volume restrictions) and without the requirement that the Company be in compliance with Rule 144(c)(1).  In the event of any such failure, and in addition to other remedies available to Hale, the Company agreed to pay Hale as liquidated damages an amount equal to 1% of the purchase price for the shares to be registered in such registration statement.  Such payments were due on the date we failed to comply with our obligation and every 30th day thereafter (pro-rated for periods totaling less than 30 days) until such failure had been cured.  The registration statement covering the resale of the shares issued to Hale was never declared effective.  Hale and the Company had agreed to amend the term “Initial Effectiveness Deadline” set forth in Section 1(o) of the Registration Rights Agreement to read in its entirety as follows “‘Initial Effectiveness Deadline’ means December 31, 2013.”
 
Impact of Debenture Repurchase and Senior Secured Note Private Placement
 
In connection with the Hale Securities Purchase Agreement, on July 2, 2010, the Company received gross proceeds of $10.5 million.  The Company incurred expenses of approximately $1.5 million in connection with the transactions contemplated by the Hale Securities Purchase Agreement, resulting in net proceeds of approximately $9.0 million.  The Company used $7.5 million of these proceeds to repurchase its outstanding debentures and allotted the remaining $1.5 million for working capital purposes, including advertising and distribution programs for its Digital Phone Service products.
 
Merriman Curhan Ford acted as the Company's financial advisor in the transaction and was paid a fee of $682,500 in connection with the transaction.  The Company also issued to Merriman Curhan Ford warrants to purchase 31,152 shares of its common stock.  The warrants are exercisable at $2.889 per share for a period of 5 years.  During the quarter ended June 30, 2013, Merriman Curhan Ford exercised the 31,152 warrants.
 
4. The 2010 Notes
 
The following summarizes other terms of the 2010 Notes:
 
Term.  The 2010 Notes were due and payable on July 2, 2014.
 
Interest.  Interest accrued at a rate equal to the prime rate as published in The Wall Street Journal as of the first business day of each interest period plus 4.75% per annum and was payable at the end of each month, with the first payment due on July 31, 2010.  Through June 30, 2011, the Company had the option to defer the monthly interest payments otherwise due and have the amount of deferred interest added to the principal balance of the 2010 Notes.  In connection with the August 2011 amendment to the 2010 Notes, through June 30, 2012, the Company had the option to defer the monthly interest payments otherwise due on $3.0 million of the 2010 Notes and to have any such amount of deferred interest added to the principal balance of the 2010 Notes.
 
Principal Payment.  In July 2011, and continuing for the 11 months thereafter, principal payments of $200,000 per month were due on the last day of each month.  Thereafter, the Company was required to pay principal in a monthly amount equal to the sum of (a) $383,702 and (b) the quotient determined by dividing the (i) aggregate amount of interest added to the principal amount by (ii) 24.  Any remaining principal amount, if not paid earlier, was due and payable on July 2, 2014.
 
 
August 2011 Amendment.  As discussed in more detail below under the heading entitled, "Rights Offering," the Company had the right to redeem up to $3.0 million of the 2010 Notes prior to maturity.  In August 2011, the Company and Hale amended the Hale Securities Purchase Agreement to (1) cancel the Company's obligation to conduct the rights offering, and (2) cancel Hale’s obligation to convert up to $3.0 million of the 2010 Notes into common stock.  As a result of the amendment, the original principal amount of the 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through June 30, 2012.  The Company's scheduled payment obligations under the 2010 Notes averaged approximately $343,000 per month through December 31, 2012.  On December 14, 2012 the 2010 Notes were paid in full.
  
No Conversion Rights.  The 2010 Notes were not convertible.
 
Security.  The 2010 Notes were secured by all of the Company's assets under the terms of a pledge and security agreement that the Company and its subsidiaries entered into with Hale.  Each of the Company's subsidiaries also entered into guarantees in favor of Hale pursuant to which each subsidiary guaranteed the complete payment and performance by the Company of its obligations under the 2010 Notes and related agreements.
 
Covenants.  The 2010 Notes imposed certain covenants on the Company, including: restrictions against incurring additional indebtedness, creating any liens on its property, entering into a change in control transaction, redeeming or paying dividends on shares of its outstanding common stock, entering into certain related party transactions, changing the nature of its business, making or investing in a joint venture, disposing of any of its assets outside of the ordinary course of business, effecting any subsequent offering of debt or equity, amending its articles of incorporation or bylaws, and limiting its ability to enter into lease arrangements.
 
Events of Default.  The 2010 Notes defined certain events of default, including: failure to make a payment obligation under the 2010 Notes, failure to pay other indebtedness when due if the amount exceeded $250,000, bankruptcy, entry of a judgment against the Company in excess of $250,000 which was not discharged or covered by insurance, failure to observe other covenants of the 2010 Notes or related agreements (subject to applicable cure periods), breach of a representation or warranty, failure of Hale’s security documents to be binding and enforceable, and casualty loss of any of the Company's assets that would have a material adverse effect on its business, and failure to meet 80% of quarterly financial targets from its annual operating budget, including cash, revenues and EBITDA.  In the event of default, additional default interest of 4% would have accrued on the outstanding balance.  In addition, in the event of default, the Company could have been required to redeem all or any portion of the 2010 Notes at a price equal to 125% of the sum of the principal amount that such holder requests that it redeem, plus accrued but unpaid interest on such principal amount, plus any accrued and unpaid late charges with respect to such principal and interest. 
 
Change of Control.  The Company was required to obtain the consent of the holders of the 2010 Notes representing at least a majority of the aggregate principal amount of the 2010 Notes then outstanding in order to enter into a change of control transaction.  If such consent were obtained, the holders of the 2010 Notes may have required the Company to redeem all or any portion of such notes at a price equal to 125% of the sum of the principal amount that such holder requested that it redeem, plus accrued but unpaid interest on such principal amount, plus any accrued and unpaid late charges with respect to such principal and interest.
 
In December 2012, the 2010 Notes were fully paid and discharged.

Rights Offering, Under the terms of the Hale Securities Purchase Agreement, the Company agreed to conduct a rights offering pursuant to which it would distribute at no charge to holders of its common stock non-transferable subscription rights to purchase up to an aggregate of 1,038,414 shares of common stock at a subscription price of $2.889 per share. Under the terms of the 2010 Notes, the Company agreed to use the gross proceeds of the rights offering to redeem an aggregate of up to $3.0 million of principal amount of the 2010 Notes. To the extent the gross proceeds of the rights offering were less than $3.0 million, the Company and Hale agreed that Hale would exchange the principal amount to be redeemed (up to $3.0 million) for shares of our common stock at an exchange price equal to the subscription price of the subscription rights.  The Company paid Hale an aggregate of $60,000 in consideration of the foregoing. In addition, the Company agreed to pay Hale upon completion of the rights offering an amount of cash equal to the accrued and unpaid interest in respect of the principal amount of the 2010 Notes redeemed or exchanged for shares of common stock in connection with the rights offering.  As discussed below the Company has cancelled the rights offering and related obligations.
 
In August 2011, the independent directors of the Company approved, and the Company and Hale entered into a settlement agreement, pursuant to which (1) Hale released the Company from any obligation to conduct the rights offering, and (2) the Company released Hale from its "backstop" obligation to convert up to $3.0 million of the 2010 Notes into common stock.  As a result of the amendment, the original principal amount of the 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through December 31, 2012.  In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million of principal (plus associated “PIK Interest”) through June 30, 2012 and to have any such amounts added to principal.  The Company's scheduled payment obligations under the 2010 Notes, assuming that it paid all of the interest current, would have averaged approximately $343,000 per month through December 31, 2012.
 
 
The value assigned to the debt and related discount and equity associated with issuance of the Recapitalization were calculated by an independent valuation firm using relative fair values.

The 2010 Notes were paid off in full on December 14, 2012 with the proceeds from the Loan Agreement.

5. Loan Agreement

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

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

   
Loan Agreement
 
2013
 
$
1,500,000
 
2014
   
1,500,000
 
2015
   
1,500,000
 
2016
   
2,650,000
 
Total payments
 
$
7,150,000
 

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

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

In addition, the Second Amendment provides that, beginning on December 1 of each year starting with 2013, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days.

There was $0.4 million outstanding under the Line of Credit as of June 30, 2013.
 

6. Refinancing of Note Obligations

On December 14, 2012, using proceeds of the term loan evidenced by the Loan Agreement and East West Note, Senior Secured Notes of Telanetix (and guaranteed by the other Borrowers) respectively in favor of HCP-TELA, LLC ("HCP"), EREF-TELA, LLC ("EREF"), and CBG-TELA, LLC ("CBG") (collectively, the "Lenders") in the original aggregate principal amount of $10,500,000 (collectively, the "2010 Notes") purchased by the Lenders pursuant to that certain Securities Purchase Agreement, dated as of June 30, 2010, by and among Telanetix and the Lenders, were paid in full.  In connection with the payment in full of the 2010 Notes, which contractually were not prepayable, an Event of Default Redemption Price (as defined in each 2010 Note) was required to be paid.  Accordingly, on December 14, 2012, the Borrowers executed and delivered Subordinated Promissory Notes to the Lenders in the aggregate original principal amount of $1,726,660 (collectively, the "Subordinated Notes").  The unpaid balance of the Subordinated Notes accrues interest at the Applicable Interest Rate.  The principal and all accrued and unpaid interest under the Subordinated Notes are to be paid on the earliest of (a) June 14, 2017, (b) the date of the acceleration of the Subordinated Notes in accordance with the terms of the Subordinated Notes, or (c) the date of the payment in full of all obligations under the East West Note.  The obligations of the Borrowers under the Subordinated Notes are secured by security interests in substantially all of the Borrowers' assets, with HCP serving as collateral agent for the Lenders, which were granted pursuant to a Security Agreement dated December 14, 2012 between the Borrowers and HCP, as collateral agent for the Lenders (the "Security Agreement").  The Security Agreement contains many of the same affirmative and negative covenants as the Loan Agreement, but does not contain any financial covenants. 
 
As a condition precedent to East West making the term loan discussed above, the Lenders and HCP, as collateral agent for the Lenders, were required to enter into a Subordination and Intercreditor Agreement (the "Subordination Agreement") with East West (which was acknowledged by the Borrowers) pursuant to which the Borrowers' obligations to the Lenders under the Subordinated Notes (and all liens and security interests granted by the Borrowers to secure those obligations) were subordinated to the obligations of the Borrowers to East West (and all liens and security interests granted by the Borrowers to secure the obligations of  the Borrowers to East West).  Under the Subordination Agreement, payments cannot be made or received under the Subordinated Notes, the Lenders cannot commence any action to collect on the obligations under the Subordinated Notes, and the Lenders and HCP, as collateral agent, cannot take any Enforcement Action (as defined in the Subordination Agreement) with respect to their collateral until the East West obligations are paid in full.
 
7. Fair Value Measurements
 
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. 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. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires companies to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

On July 2, 2010, in connection with the recapitalization discussed above, the Company repurchased all if it’s then-outstanding debentures and converted all of its then-outstanding warrants that were issued in connection with such debentures.  As a result, the Company eliminated the beneficial conversion feature derivative liability.  Prior to the recapitalization the Company recorded a liability related beneficial conversion features, which was revalued at fair value at the end of each quarter with the gain or loss being recognized in the consolidated statement of operations.  

  8. Warrants
 
There were no shares subject to warrants at June 30, 2013 and 36,661 shares subject to warrants at a weighted average exercise price of $22.84 as of June 30, 2012.
 
During the first six months ended June 30, 2013, 1,400 warrants expired and 31,152 were exercised.

9. Business Risks and Credit Concentration
 
The Company’s cash is maintained with a limited number of commercial banks, and is invested in the form of demand deposit accounts.  Deposits in these institutions may exceed the amount of FDIC insurance provided on such deposits.
 
The Company markets its products to resellers and end-users primarily in the United States.  Management performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.  There can be no assurance that the Company’s credit loss experience will remain at or near historic levels.  Two customers accounted for 34% of gross accounts receivable at June 30, 2013 and 36% at June 30, 2012.
 
 
Two customers accounted for more than 10% of the Company’s revenue during the three and six months ended June, 2013 and one customer accounted for 12% of the Company’s revenue during the three months ended June 30, 2012 and 10% during the six months ended June 30, 2012.  
 
The Company relies on primarily one third party network service provider for network services.  If this service provider failed to perform on its obligations to the Company, such failure could materially impact future operating results, financial position and cash flows.
 
10. Commitments and Contingencies
 
Leases
 
The Company has non-cancelable operating and capital leases for corporate facilities and equipment.

Future minimum rental payments required under non-cancelable operating and capital leases are as follows:

   
Operating Leases
   
Capital Leases
 
                 
2013
   
437,869
     
554,231
 
2014
   
474,016
     
1,072,814
 
2015
   
96,554
     
636,218
 
2016
           
80,333
 
2017
           
8,922
 
Total minimum lease payments
 
$
1,008,439
     
2,352,518
 
Less amount representing interest
           
(190,624
)
Present value of minimum lease payments
           
2,161,894
 
Less current portion
           
(965,053
)
           
$
1,196,841
 
 
Minimum Third Party Network Service Provider Commitments
 
The Company has a contract with a third party network service provider that facilitates interconnects with a number of third party network service providers.  The contract contains a minimum usage guarantee of $0.2 million per monthly billing cycle and is on a month to month basis.  The cancellation terms are month to month.
 
Litigation
 
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief.  The amount of the ultimate liability, if any, from such claims cannot be determined.  However, in the opinion of our management, there are no legal claims currently pending or threatened against us that would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
 
11. Stock Based Compensation
 
Stock Option Plan
 
The Company maintains two equity plans: the 2005 Equity Incentive Plan (the “2005 Plan”) and the 2010 Stock Incentive Plan (the “2010 Plan”).
 
 
The 2005 Plan, which was approved by the Company’s stockholders in August 2006, permits the Company to grant shares of common stock and options to purchase shares of common stock to the Company’s employees for up 66,667 shares of common stock.  The Company believes that such awards better align the interests of its employees with those of its stockholders.  Option awards are generally granted with an exercise price that equals the market price of the Company's stock at the date of grant; these option awards generally vest based on 3 years of continuous service and have 10-year contractual terms.  On November 8, 2007, the Board of Directors approved an amendment to the 2005 Plan to increase the number of shares of common stock available for grant to 113,333 shares. On December 11, 2008, the Board of Directors approved an additional amendment to the 2005 Plan to increase the number of shares of common stock available for grant to 206,667 shares.  At June 30, 2013 there were 91,225 options outstanding under the 2005 plan.  The Board of Directors has indicated that it does not intend to make any further option grants under the 2005 Plan.
 
The 2010 Plan, which was approved by the Company’s stockholders in July 2010, permits the Company to grant options to purchase, and other stock-based awards covering, in the aggregate, 1,189,198 shares of the Company’s common stock to the Company’s employees, directors or consultants.   The Company believes that such awards will aid in recruiting and retaining key employees, directors or consultants and to motivate such employees, directors or consultants to exert their best effort on behalf of the Company.  Option awards are granted in four Tranches with Tranche 1 shares having an option price of $3.00 per share and Tranches 2, 3, and 4 having an option price of $5.778 per share.  Tranche 1 option awards vest fifty percent (50%) of the awarded shares upon Hale receiving cash proceeds in return on its Invested Capital (as defined in the 2010 Plan) in the Company and its subsidiaries which cash proceeds equal no less than one times its Invested Capital  plus a four percent (4%) annual return on such Invested Capital, compounded annually (the “Tranche 1 Return”).  Notwithstanding the foregoing and the failure of Hale to have achieved the Tranche I Return, Tranche 1 shares shall vest with respect to ten percent (10%) of such Tranche 1 shares on each of the first, second, and third anniversaries of the Effective Date, irrespective of whether such Tranche 1 shares were issued as of such dates subject to the Participant’s continued employment in good standing with the Company on each such anniversary.   Tranche 2 option awards vest sixteen and sixty-fifth one hundredths percent (16.65%) upon Hale receiving cash proceeds in return on its Invested Capital in the Company and its subsidiaries which cash proceeds equal no less than two times its Invested Capital plus four percent (4%) annual return on such Invested Capital, compounded annually and subject to the Participant’s continued employment in good standing with the Company on the Tranche 2 vesting date.  Tranche 3 option awards vest sixteen and sixty-fifth one hundredths percent (16.65%) upon Hale receiving cash proceeds in return on its Invested Capital in the Company and its subsidiaries which cash proceeds equal no less than three times its Invested Capital plus four percent (4%) annual return on such Invested Capital, compounded annually and subject to the Participant’s continued employment in good standing with the Company on the Tranche 3 vesting date.  Tranche 4 option awards vest sixteen and sixty seventieth one hundredths percent (16.67%) upon Hale receiving cash proceeds in return on its Invested Capital in the Company and its subsidiaries which cash proceeds equal no less than four times its Invested Capital plus four percent (4%) annual return on such Invested Capital, compounded annually and subject to the Participant’s continued employment in good standing with the Company on the Tranche 4 vesting date.  Option under the 2010 Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Compensation Committee of the Company’s Board of Directors, but in no event shall an Option be exercisable more than ten years after the date it is granted.
 
An amendment to the 2010 Plan (the “2010 Plan Amendment”) was approved by the Company’s stockholders and became effective in May 2011.   The 2010 Plan Amendment was adopted in connection with the terms of the Hale Securities Purchase Agreement dated June 30, 2010.  Pursuant to Section 1(e) of the Hale Securities Purchase Agreement the Company agreed to grant shares of common stock to Hale, in the event that the Company received a notice  that it is obligated to pay certain specified contingent liabilities within two years of the closing (a “Contingent Share Issuance”).  The Company received such notice in April 2011, and in accordance with the terms of the Hale Securities Purchase Agreement, the Company issued an aggregate of 225,576 shares of common stock to Hale.  The Hale Securities Purchase Agreement provides that in the event of a Contingent Share Issuance a proportionate adjustment would be made to the number of shares of our common stock reserved under the 2010 Plan.  Based on the Contingent Share Issuance, the Company’s board of directors approved an increase in the number of shares of common stock subject to the 2010 Plan from 1,189,198 to 1,232,121 shares.  In addition the 2010 Plan Amendment provides that the maximum aggregate number of shares available for issuance under the Plan will increase automatically by one share for every four shares issued in any future Contingent Share Issuance up to a maximum of 1,493,333 shares.   During the fourth quarter of 2012 and based on the Contingent Share Issuance, the number of shares increased by 75,001 shares.  At June 30, 2013 there were 1,090,889 options outstanding under the 2010 plan.

A summary of option activity under the 2005 Plan and 2010 Plan as of June 30, 2013 is presented below:

   
Shares
   
Weighted-Average Exercise Price
 
Outstanding at December 31, 2012
   
1,130,938
   
$
5.51
 
Granted
   
51,865
     
4.39
 
Exercised
   
(340
)
   
3.00
 
Forfeited or expired
   
(349
)
   
5.73
 
Outstanding at June 30, 2013
   
1,182,114
   
$
5.46
 

 
The options outstanding and currently exercisable by exercise price at June 30, 2013 are as follows:
 
   
Stock options outstanding
 
Stock Options Exercisable
 
Range of Exercise Prices
 
Number Outstanding
 
Weighted-Average Remaining Contractual Term (Years)
 
Weighted-Average Exercise Price
 
Number Exercisable
 
Weighted-Average Remaining Contractual Term (Years)
 
Weighted-Average Exercise Price
 
$
3.00
to
4.50
 
547,819
 
7.84
 
$
3.00
 
547,819
 
7.84
 
$
3.00
 
$
4.50
to
7.50
 
619,346
 
7.51
 
$
5.71
 
73,894
 
5.01
 
$
5.18
 
$
7.50
to
11.25
 
9,535
 
2.62
 
$
7.97
 
9,535
 
2.62
 
$
7.97
 
$
191.22
to
262.43
 
5,414
 
4.08
 
$
221.91
 
5,414
 
4.08
 
$
221.91
 
   
1,182,114
 
7.61
 
$
5.46
 
636,662
 
7.40
 
$
5.19
 
 
As of June 30, 2013, 636,662 options were exercisable at an aggregate average exercise price of $5.19.  The aggregate intrinsic value of stock options outstanding and stock options exercisable at June 30, 2013 was approximately $2.2 million.

As of June 30, 2013, total compensation cost related to non-vested stock options not yet recognized was $1.4million, which is related to stock options in Tranches 2, 3 and 4 with contingent vesting that will be recognized if, in the future, it is deemed probable that such options will become exercisable.

Valuation and Expense Information
 
The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based upon estimated fair values.  The following table summarizes stock-based compensation expense recorded for the three and six months ended June 30, 2013 and 2012, and its allocation within the Consolidated Statements of Operations:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Selling and marketing
 
$
   
$
16,204
   
$
   
$
32,339
 
General and administrative
   
     
59,450
     
10,102
     
119,814
 
Research and development
   
     
26,260
     
     
52,220
 
Total stock-based compensation expense related to employee equity awards
   
     
101,914
     
10,102
     
204,373
 
 
Valuation Assumptions:
 
The Company uses the Black Scholes option pricing model in determining its option expense.    The weighted-average estimated fair value of employee stock options granted during the three and six months ended June 30, 2013 was $4.39 per share.  There were no option granted during the three months ended June 30, 2013 and 51,865 options granted during the three months ended March 31, 2013.  There were no options granted during the three and six months ended June 30, 2012 and March 31, 2012.  
 
As the stock-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, such amounts have been reduced for estimated forfeitures estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 

12. Computation of Net Income (Loss) Per Share
 
Basic net income (loss) per share is based upon the weighted average number of common shares outstanding.  Diluted net income (loss) per share is based on the assumption that all potential common stock equivalents (convertible preferred stock, convertible debentures, stock options, and warrants) are converted or exercised.  The calculation of diluted net income (loss) per share excludes potential common stock equivalents if the effect is anti-dilutive.  The Company's weighted average common shares outstanding for basic and dilutive are the same because the effect of the potential common stock equivalents is anti-dilutive.  The Company has the following dilutive common stock equivalents for the three and six months ended June, 2013 and 2012, which were excluded from the net loss per share calculation because their effect is anti-dilutive.
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Stock Options
   
1,182,114
     
1,131,701
     
1,182,114
     
1,131,701
 
Warrants
   
     
36,661
     
     
36,661
 
    Total
   
1,182,114
     
1,168,362
     
1,182,114
     
1,168,362
 

13. Agreement and Plan of Merger

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

The aggregate consideration to be paid by Parent and Merger Sub in the Merger for all of the outstanding equity interests of the Company, including securities convertible into shares of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”), is approximately $41.5 million, minus the sum of (i) the amount (if any) by which the Transaction Expenses (as defined in the Merger Agreement) exceed $2,525,000, (ii) the amount (if any) by which the Regulatory Expenses (as defined in the Merger Agreement) exceed $200,000 (as so adjusted, the “Merger Consideration”), and certain other potential adjustments described below.  The Merger Consideration will also be increased by the proceeds of certain warrant and option exercises, if any, occurring between the date of the Merger Agreement and the closing of the Merger.
 
At the effective time of the Merger, each share of Company Common Stock issued and outstanding immediately prior to the effective time of the Merger, other than (i) shares held in the treasury of the Company and shares owned by Parent, Merger Sub, or any subsidiary of Parent or the Company (which shares will be cancelled) and (ii) shares that are, as of immediately prior to the effective time of the Merger, owned by stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal pursuant to Section 262 of the Delaware General Corporation Law with respect to such shares, will be converted into the right to receive an amount in cash equal to the Per Share Merger Consideration.  The Merger Agreement defines “Per Share Merger Consideration” as the Merger Consideration divided by the Fully Diluted Share Number (as defined in the Merger Agreement). We originally estimated the Per Share Merger Consideration to be approximately $7.40, however, due to increases in certain Transaction Expenses and Regulatory Expenses, primarily due to regulatory issues and complexities of the transaction, we currently estimate the Per Share Merger Consideration to be in the range of $7.33 to $7.27.   Please note that this estimate of the Per Share Merger Consideration reflects currently available information and does not include additional Transaction Expenses or Regulatory Expenses that may be incurred in connection with regulatory reviews and stockholder matters.  If expenses beyond what is currently estimated are required, there are likely to be further downward adjustments to the Per share Merger Consideration, which expenses and adjustments are more fully described in the Merger Agreement.  The Merger Consideration is subject to decrease in certain circumstances described above, and also may be decreased for amounts, if any, placed in escrow to cover certain matters that arise, if any, prior to the Merger closing, up to a maximum aggregate amount of $5,000,000, or for Merger Consideration held back under certain circumstances.  The Company’s senior and subordinated debt will be paid in full in connection with the closing of the Merger, which payments will not affect the amount of Merger Consideration.
 
Each (i) outstanding option to purchase shares of Company Common Stock (a “Company Stock Option”) and granted under any stock option plan to which the Company or any of its subsidiaries is a party, whether or not then exercisable and (ii) outstanding warrant to purchase shares of Company Common Stock (a “Company Warrant”) shall, as of the effective time of the Merger, be cancelled, and the holder thereof shall be entitled to the right to receive, without any interest thereon, an amount in cash payable immediately following the cancellation of such Company Stock Option or Company Warrant, as the case may be, equal to (i) the number of shares of Company Common Stock subject to the Company Stock Option or Company Warrant, as the case may be, in each case, as of immediately prior to the effective time of the Merger and (ii) the difference (if any) between (x) the Per Share Merger Consideration and (y) the per share exercise price with respect to such Company Stock Option or Company Warrant, as the case may be.
 
 
The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among other things, the approval of the Merger by the Federal Communications Commission and applicable state public service or public utility commissions or other similar state regulatory bodies, and the adoption and approval of the Merger Agreement by the Company’s stockholders, which was effected on January 19, 2013 by the written consent of the holders of 4,358,942 shares of Company Common Stock, or approximately 85.1% of the outstanding shares entitled to cast a vote with respect to the adoption and approval of the Merger Agreement.  Parent’s and Merger Sub’s obligations to consummate the Merger are not subject to a financing condition; provided, that Parent's and Merger Sub's obligations to close the Merger are subject to certain caps on liability set forth in the Merger Agreement.

The Merger Agreement contains customary termination provisions, including, without limitation, that the Merger Agreement may be terminated by the Company if the Merger has not been consummated by the close of business on October 15, 2013, other than due to the failure of the Company to fulfill its obligations under the Merger Agreement. The Merger Agreement requires the Company to pay a $2,000,000 termination fee to Parent under certain limited circumstances.  In addition, the Merger Agreement requires Parent to pay a $5,250,000 termination fee to the Company under certain limited circumstances. 
 
The Merger Agreement contains customary representations and warranties made by the Company, Parent and Merger Sub.  In addition, the Company has agreed to various covenants in the Merger Agreement, including, among other things, covenants to continue to conduct its business in the ordinary course and in accordance with past practices and not to take certain actions prior to the closing of the Merger without the prior consent of Parent.

On May 8, 2013, Parent, Merger Sub and the Company entered into an amendment (the “Amendment”) to the Merger Agreement to make certain technical clarifications to reflect the original intent of the parties, including that the aggregate merger consideration would be increased by the proceeds of certain warrant and option exercises, if any, occurring between the date of the Merger Agreement and the closing of the Merger.

The Merger Agreement provides that if by August 16, 2013, the condition to Parent’s obligation to close the Merger relating to the receipt of regulatory approvals and assurances has not been satisfied and Parent has obtained  extensions of its financing commitments to October 15, 2013, then the “Company Outside Date” (as defined in the Merger Agreement) would be extended to October 15, 2013.  As of the date hereof, the condition relating to the receipt of regulatory approvals and assurances has not been satisfied, and Parent has obtained financing recommitments in accordance with the terms of the Merger Agreement.  Accordingly, the Company Outside Date is October 15, 2013.

The foregoing descriptions of the terms of the Merger Agreement and Amendment are not complete and are qualified in their entirety by reference to the Merger Agreement and Amendment, copies of which are attached as Exhibit 2.1 to the Current Report on Form 8-K dated January 22, 2013 and Exhibit 2.1 to the Current Report on Form 8-K dated May 8, 2013, respectively, and incorporated herein by reference.  The Merger Agreement and Amendment have been attached to provide investors with information regarding their terms. They are not intended to provide any other factual information about the Company or Parent. In particular, the assertions embodied in the representations and warranties contained in the Merger Agreement are qualified by information in a confidential Disclosure Schedule provided by the Company to Parent in connection with the signing of the Merger Agreement. The confidential Disclosure Schedule contains information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were used for the purpose of allocating risk between the Company and Parent rather than establishing matters as facts. Accordingly, you should not rely on the representations and warranties in the Merger Agreement as characterizations of the actual state of facts about the Company or Parent.

The Company expects the Merger to close in the second half of 2013.
 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. Readers are also urged to carefully review and consider the various disclosures made by us that attempt to advise interested parties of the factors that affect our business, including without limitation, the disclosures referenced under "Item 1A. Risk Factors" included in Part II of this report.
 
Overview
 
Business
 
We are a cloud based IP voice services company.  Our company is built on the belief that business telecommunication need not be expensive or complicated.  Through our AccessLine-branded Voice Services, we provide customers with a range of business phone services and applications that are easy to purchase, easy to install, easy to use and most importantly provide significant savings.  Our customers have the ability to easily configure their service to meet the unique needs of their business.  At the core of our cloud based, hosted service is our proprietary software, which is developed internally and runs on standard commercial grade servers.  By delivering business phone service to the market in this manner, our Voice Services offer flexibility and ease of use to any sized business customer, at an affordable price point.
 
AccessLine offers the following cloud based, hosted Voice over IP services: Digital Phone System (DPS), SIP Trunking Service and a la carte, individual phone services.  DPS replaces a customer's existing telephone lines and phone system with a Voice over IP alternative. It is sold as a complete turn-key solution where we bundle business-class phone equipment which is manufactured by third parties, along with our reliable voice network services.  This service is primarily targeted at small businesses looking for a fully integrated solution that does not require expert assistance to install or manage.  SIP Trunking Service replaces high-cost telephone lines with a low cost yet high quality IP alternative.  SIP Trunking is for larger businesses that already have their own on premise equipment (PBX) and is targeted at those businesses with large calling volumes looking for cost effective alternatives to traditional carrier offerings. SIP Trunking Service can support businesses with hundreds to thousands of employees.
 
AccessLine-branded services also offer a la carte phone services and features including conferencing calling services, find-me and follow-me services, toll-free services, and automated attendant service.  Each a la carte service can be purchased individually through AccessLine’s various websites.  All services include easy-to-use web interfaces for simple management and customizations.
 
Our revenues principally consist of: monthly recurring fees, activation, and usage fees from the communication services and solutions outlined above. There are some ancillary one time equipment charges associated with our DPS solution.

Recapitalization

Debenture Repurchase
 
On June 30, 2010, we entered into a securities purchase agreement with the holders of our then outstanding debentures in the principal amount of $29.6 million.  Under the terms of the agreement, we repurchased and cancelled all of our outstanding debentures in exchange for payment of $7.5 million in cash.  Additionally, the holders of the debentures exchanged all outstanding warrants they held for shares of our common stock and we issued to such holders an additional number of shares of our common stock, such that the holders collectively and beneficially owned approximately 221,333 shares of our common stock immediately following the completion of the transactions contemplated by the agreement.  We also paid $7.5 million in cash from the proceeds of our senior secured note private placement described below.
 
After giving effect to the transactions contemplated by the debenture repurchase described above and the transactions contemplated by the senior secured note private placement described below, we had $10.5 million of senior secured notes outstanding and all our previously issued debentures, which had a principal balance of $29.6 million, were cancelled.  
 
Senior Secured Notes Private Placement
 
On June 30, 2010, we entered into a securities purchase agreement, which we refer to as the “Hale Securities Purchase Agreement” in this report, with affiliates of Hale Capital Management, LP, whom we refer to collectively as “Hale” in this report, pursuant to which, in exchange for $10.5 million, we issued to Hale $10.5 million of senior secured notes, which we refer to as the “2010 Notes” in this report, and 3,833,356 unregistered shares of our common stock.  For a summary of material terms of the 2010 Notes see “Commitments and Contingencies” below.
 
 
We agreed to a number of provisions in the Hale Securities Purchase Agreement that protected Hale’s investment, including:
 
Most Favored Nation.  For so long as the 2010 Notes were outstanding and until Hale ceased to own ten percent of our outstanding common stock, if we (i) issued debt on terms that were more favorable than the terms of the 2010 Notes, or (ii) issued common stock, preferred stock, equivalents or any other equity security on terms more favorable than those set out in the Hale Securities Purchase Agreement, then the terms of the 2010 Notes and/or the Hale Securities Purchase Agreement would automatically have been amended such that Hale would have received the benefit of the more favorable terms.
 
Right of First Refusal.  For so long as the 2010 Notes were outstanding and until Hale ceased to own ten percent of our outstanding common stock, Hale had a right of first refusal on any subsequent placement that we might have made of common stock or common stock equivalents, or any of securities convertible into or exchangeable or exercisable for shares of our common stock.
 
Fundamental Transactions.  For so long as the 2010 Notes remained outstanding, and thereafter for as long as any of the Hale purchasers continued to own twenty percent of the common stock that they purchased under the Hale Securities Purchase Agreement, we were notable to effect a transaction in which we consolidated or merged with another entity, conveyed all or substantially all of our assets, permitted another person or group to acquire more than fifty percent of our voting stock, or reorganized or reclassified our common stock, without the majority consent of Hale.  Additionally, we could not have effected such a transaction without obtaining the foregoing requisite consent if such transaction would have triggered the most favored nation provision in the Hale Securities Purchase Agreement described above, or if such transaction would have otherwise involved the issuance of any equity securities or the incurrence of debt at a price that was less than the price paid in connection with the transaction consummated under the Hale Securities Purchase Agreement.
 
In December of 2012, the 2010 Notes were fully paid and discharged.

Post-Closing Adjustment Shares.  If at any time prior to July 2, 2012, we had been required to make payment on certain identified contingent liabilities up to an aggregate amount of $464,831, then we would have been required to issue additional shares of common stock to Hale, such that the total percentage ownership of our fully diluted common stock immediately after the payment of such liabilities would equal the same percentage ownership that Hale would have had if the contingent payable had been paid prior to the closing under the Hale Securities Purchase Agreement. To date $464,831 of these contingent liabilities have been incurred as expenses.  Accordingly, in April 2011 we issued to Hale an additional 225,576 shares of our common stock under the terms of the Hale Securities Purchase Agreement.  As anticipated in our quarterly report on Form 10-Q for the quarter ended September 30, 2012, on November 16, 2012 we issued to Hale the remaining 300,004 shares of common stock in final settlement of the contingent liabilities.
 
Registration Rights Agreement
 
In connection with the Hale Securities Purchase Agreement, we entered into a registration rights agreement with Hale pursuant to which we agreed to file a registration statement with the SEC for the resale of the shares issued and issuable to Hale under the Hale Securities Purchase Agreement.  We filed that registration statement on September 30, 2010.  The registration rights agreement contains penalty provisions in the event that we failed to secure the effectiveness of that registration statement by November 29, 2010, failed to file other registration statements we were required to file under the terms of the registration rights agreement in a timely manner, or if we failed to maintain the effectiveness of any registration statement we were required to file under the terms of the registration rights agreement until the shares issued to Hale were sold or could be sold under Rule 144 without restriction or limitation (including volume restrictions) and without the requirement that our company be in compliance with Rule 144 (c)(1).  In the event of any such failure, and in addition to other remedies available to Hale, we agreed to pay Hale as liquidated damages an amount equal to 1% of the purchase price for the shares to be registered in such registration statement.  Such payments were due on the date we failed to comply with our obligation and every 30th day thereafter (pro-rated for periods totaling less than 30 days) until such failure should have been cured.  The registration statement covering the resale of the shares issued to Hale was never declared effective.  Hale and the Company had agreed to amend the term “Initial Effectiveness Deadline” set forth in Section 1(o) of the Registration Rights Agreement to read in its entirety as follows: “‘Initial Effectiveness Deadline‘ means December 31, 2013.”
 
Impact of Debenture Repurchase and Senior Secured Note Private Placement
 
In connection with the Hale Securities Purchase Agreement we received gross proceeds of $10.5 million.  We incurred expenses of $1.5 million in connection with the transaction contemplated by the Hale Securities Purchase Agreement, resulting in net proceeds of approximately $9.0 million.  We used $7.5 million of these proceeds to repurchase our outstanding debentures and allotted the remaining $1.5 million for working capital purposes, including advertising and distribution programs for our Digital Phone Service products.
 
 
Merriman Curhan Ford acted as our financial advisor in the transaction, and we paid them a fee of $682,500 in connection with the transaction.  We also issued Merriman Curhan Ford warrants to purchase 31,152 shares of our common stock.  The warrants are exercisable at $2.889 per share for a period of 5 years. In the second quarter of 2013, Merriman Curhan Ford exercised their warrants in exchange for 18,459 shares of our common stock.
 
Rights Offering
 
Under the terms of the Hale Securities Purchase Agreement, we agreed to conduct a rights offering pursuant to which we would distribute at no charge to holders of our common stock non-transferable subscription rights to purchase up to an aggregate 1,038,414 shares of our common stock at a subscription price of $2.889 per share.  Under the terms of the 2010 Notes, we agreed to use the gross proceeds from the rights offering to redeem an aggregate of up to $3.0 million of principle amount of such notes.  To the extent the gross proceeds of the rights offering were less than $3.0 million, we and Hale agreed that Hale would exchange the principal amount to be redeemed (up to $3 million) for shares of our common stock at an exchange price equal to the subscription price of the subscription rights.  We paid Hale an aggregate of $60,000 as consideration for the foregoing.  In addition, we agreed to pay Hale upon completion of the rights offering an amount of cash equal to the accrued and unpaid interest in respect of the principal amount of the senior secured notes redeemed or exchanged for shares of common stock in connection with the rights offering.  As discussed in the following paragraph, the Company subsequently cancelled the rights offering and related obligations.
 
In August 2011, the independent directors of the Company approved, and the Company and Hale entered into, a settlement agreement, pursuant to which (1) Hale released the Company from any obligation to conduct the rights offering, and (2) the Company released Hale from its "backstop" obligation to convert up to $3.0 million of the 2010 Notes into common stock.  As a result of the amendment, the original principal amount of the 2010 Notes then outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through December 31, 2012.  In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million of principal (plus associated “PIK Interest”) through June 30, 2012 and to have any such amounts added to principal.  On December 14, 2012 the 2010 Notes were paid in full.

Recent Developments

Our overriding objective is to grow revenue while achieving operating profitability and generating cash from operations.  In the first half of 2013 and 2012 we addressed this objective through the growth in our core voice businesses. 
 
We experienced growth in revenue and gross profit for our AccessLine division in both the first half of 2013 and 2012. We increased revenue during 2013 through, in part, due to increased efficiency in our advertising and also through our success in selling our SIP Trunking Service through direct and agent channels. Our Digital Phone Service continues to grow month over month.  We increased our year-to-date gross profit through our continued progress in optimizing our network configuration.

Second Amendment to Loan and Security Agreement

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

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

In addition, the Second Amendment provides that, beginning on December 1 of each year starting with 2013, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days.

The Borrowers borrowed $0.4 million under the Line of Credit as of June 30, 2013.
 

Agreement and Plan of Merger

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

The aggregate consideration to be paid by Parent and Merger Sub in the Merger for all of the outstanding equity interests of the Company, including securities convertible into shares of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”), is approximately $41.5 million, minus the sum of (i) the amount (if any) by which the Transaction Expenses (as defined in the Merger Agreement) exceed $2,525,000, (ii) the amount (if any) by which the Regulatory Expenses (as defined in the Merger Agreement) exceed $200,000 (as so adjusted, the “Merger Consideration”), and certain other potential adjustments described below.  The Merger Consideration will also be increased by the proceeds of certain warrant and option exercises, if any, occurring between the date of the Merger Agreement and the closing of the Merger.
 
At the effective time of the Merger, each share of Company Common Stock issued and outstanding immediately prior to the effective time of the Merger, other than (i) shares held in the treasury of the Company and shares owned by Parent, Merger Sub, or any subsidiary of Parent or the Company (which shares will be cancelled) and (ii) shares that are, as of immediately prior to the effective time of the Merger, owned by stockholders who have perfected and not withdrawn a demand for, or lost their right to, appraisal pursuant to Section 262 of the Delaware General Corporation Law with respect to such shares, will be converted into the right to receive an amount in cash equal to the Per Share Merger Consideration.  The Merger Agreement defines “Per Share Merger Consideration” as the Merger Consideration divided by the Fully Diluted Share Number (as defined in the Merger Agreement). We originally estimated the Per Share Merger Consideration to be approximately $7.40, however, due to increases in certain Transaction Expenses and Regulatory Expenses, primarily due to regulatory issues and complexities of the transaction, we currently estimate the Per Share Merger Consideration to be in the range of $7.33 to $7.27.   Please note that this estimate of the Per Share Merger Consideration reflects currently available information and does not include additional Transaction Expenses or Regulatory Expenses that may be incurred in connection with regulatory reviews and stockholder matters.  If expenses beyond what is currently estimated are required, there are likely to be further downward adjustments to the Per share Merger Consideration, which expenses and adjustments are more fully described in the Merger Agreement.  The Merger Consideration is subject to decrease in certain circumstances described above, and also may be decreased for amounts, if any, placed in escrow to cover certain matters that arise, if any, prior to the Merger closing, up to a maximum aggregate amount of $5,000,000, or for Merger Consideration held back under certain circumstances.  The Company’s senior and subordinated debt will be paid in full in connection with the closing of the Merger, which payments will not affect the amount of Merger Consideration.
 
Each (i) outstanding option to purchase shares of Company Common Stock (a “Company Stock Option”) and granted under any stock option plan to which the Company or any of its subsidiaries is a party, whether or not then exercisable and (ii) outstanding warrant to purchase shares of Company Common Stock (a “Company Warrant”) shall, as of the effective time of the Merger, be cancelled, and the holder thereof shall be entitled to the right to receive, without any interest thereon, an amount in cash payable immediately following the cancellation of such Company Stock Option or Company Warrant, as the case may be, equal to (i) the number of shares of Company Common Stock subject to the Company Stock Option or Company Warrant, as the case may be, in each case, as of immediately prior to the effective time of the Merger and (ii) the difference (if any) between (x) the Per Share Merger Consideration and (y) the per share exercise price with respect to such Company Stock Option or Company Warrant, as the case may be.
 
The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among other things, the approval of the Merger by the Federal Communications Commission and applicable state public service or public utility commissions or other similar state regulatory bodies, and the adoption and approval of the Merger Agreement by the Company’s stockholders, which was effected on January 19, 2013 by the written consent of the holders of 4,358,942 shares of Company Common Stock, or approximately 85.1% of the outstanding shares entitled to cast a vote with respect to the adoption and approval of the Merger Agreement.  Parent’s and Merger Sub’s obligations to consummate the Merger are not subject to a financing condition; provided, that Parent's and Merger Sub's obligations to close the Merger are subject to certain caps on liability set forth in the Merger Agreement.

The Merger Agreement contains customary termination provisions, including, without limitation, that the Merger Agreement may be terminated by the Company if the Merger has not been consummated by the close of business on October 15, 2013, other than due to the failure of the Company to fulfill its obligations under the Merger Agreement. The Merger Agreement requires the Company to pay a $2,000,000 termination fee to Parent under certain limited circumstances.  In addition, the Merger Agreement requires Parent to pay a $5,250,000 termination fee to the Company under certain limited circumstances. 
 
The Merger Agreement contains customary representations and warranties made by the Company, Parent and Merger Sub.  In addition, the Company has agreed to various covenants in the Merger Agreement, including, among other things, covenants to continue to conduct its business in the ordinary course and in accordance with past practices and not to take certain actions prior to the closing of the Merger without the prior consent of Parent.
 
 
On May 8, 2013, Parent, Merger Sub and the Company entered into an amendment (the “Amendment”) to the Merger Agreement to make certain technical clarifications to reflect the original intent of the parties, including that the aggregate merger consideration would be increased by the proceeds of certain warrant and option exercises, if any, occurring between the date of the Merger Agreement and the closing of the Merger.

The Merger Agreement provides that if by August 16, 2013, the condition to Parent’s obligation to close the Merger relating to the receipt of regulatory approvals and assurances has not been satisfied and Parent has obtained  extensions of its financing commitments to October 15, 2013, then the “Company Outside Date” (as defined in the Merger Agreement) would be extended to October 15, 2013.  As of the date hereof, the condition relating to the receipt of regulatory approvals and assurances has not been satisfied, and Parent has obtained financing recommitments in accordance with the terms of the Merger Agreement.  Accordingly, the Company Outside Date is October 15, 2013.

The foregoing descriptions of the terms of the Merger Agreement and Amendment are not complete and are qualified in their entirety by reference to the Merger Agreement and Amendment, copies of which is attached as Exhibit 2.1 the Current Report on Form 8-K dated January 22, 2013 and Exhibit 2.1 to the Current Report on Form 8-K dated May 8, 2013, respectively, and incorporated herein by reference.  The Merger Agreement and Amendment have been attached to provide investors with information regarding their terms. They are not intended to provide any other factual information about the Company or Parent. In particular, the assertions embodied in the representations and warranties contained in the Merger Agreement are qualified by information in a confidential Disclosure Schedule provided by the Company to Parent in connection with the signing of the Merger Agreement. The confidential Disclosure Schedule contains information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Merger Agreement. Moreover, certain representations and warranties in the Merger Agreement were used for the purpose of allocating risk between the Company and Parent rather than establishing matters as facts. Accordingly, you should not rely on the representations and warranties in the Merger Agreement as characterizations of the actual state of facts about the Company or Parent.

The Company expects the Merger to close in the second half of 2013.

Loan Agreement

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

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

Refinancing of Note Obligations

On December 14, 2012, using proceeds of the term loan evidenced by the Loan Agreement and East West Note, Senior Secured Notes of Telanetix (and guaranteed by the other Borrowers) respectively in favor of HCP-TELA, LLC ("HCP"), EREF-TELA, LLC ("EREF"), and CBG-TELA, LLC ("CBG") (collectively, the "Lenders") in the original aggregate principal amount of $10,500,000 (collectively, the "2010 Notes") purchased by the Lenders pursuant to that certain Securities Purchase Agreement, dated as of June 30, 2010, by and among Telanetix and the Lenders, were paid in full.  In connection with the payment in full of the 2010 Notes, which contractually were not prepayable, an Event of Default Redemption Price (as defined in each 2010 Note) was required to be paid.  Accordingly, on December 14, 2012, the Borrowers executed and delivered Subordinated Promissory Notes to the Lenders in the aggregate original principal amount of $1,726,660 (collectively, the "Subordinated Notes").  The unpaid balance of the Subordinated Notes accrues interest at the Applicable Interest Rate.  The principal and all accrued and unpaid interest under the Subordinated Notes are to be paid on the earliest of (a) June 14, 2017, (b) the date of the acceleration of the Subordinated Notes in accordance with the terms of the Subordinated Notes, and (c) the date of the payment in full of all obligations under the East West Note.  The obligations of the Borrowers under the Subordinated Notes are secured by security interests in substantially all of the Borrowers' assets, with HCP serving as collateral agent for the Lenders, which were granted pursuant to a Security Agreement dated December 14, 2012 between the Borrowers and HCP, as collateral agent for the Lenders (the "Security Agreement").  The Security Agreement contains many of the same affirmative and negative covenants as the Loan Agreement, but does not contain any financial covenants.   
 

As a condition precedent to East West making the term loan discussed above, the Lenders and HCP, as collateral agent for the Lenders, were required to enter into a Subordination and Intercreditor Agreement (the "Subordination Agreement") with East West (which was acknowledged by the Borrowers) pursuant to which the Borrowers' obligations to the Lenders under the Subordinated Notes (and all liens and security interests granted by the Borrowers to secure those obligations) were subordinated to the obligations of the Borrowers to East West (and all liens and security interests granted by the Borrowers to secure the obligations of  the Borrowers to East West).  Under the Subordination Agreement, payments cannot be made or received under the Subordinated Notes, the Lenders cannot commence any action to collect on the obligations under the Subordinated Notes, and the Lenders and HCP, as collateral agent, cannot take any Enforcement Action (as defined in the Subordination Agreement) with respect to their collateral until the East West obligations are paid in full.
 
Results of Operations
 
Second Quarter of Fiscal 2013 Compared to Second Quarter of Fiscal 2012
 
Revenues, Cost of Revenues and Gross Profit
 
               
Increase/(Decrease)
 
   
2013
   
2012
   
Dollars
   
Percent
 
Three Months Ended June 30:
                       
Revenues
 
$
9,081,561
   
$
7,861,644
   
$
1,219,917
     
15.5
%
Cost of revenues
   
3,429,668
     
3,311,487
     
118,181
     
3.6
%
    Gross profit
   
5,651,893
     
4,550,157
     
1,101,736
     
24.2
%
    Gross profit percentage
   
62.2
%
   
57.9
%
               
                                 
Six Months Ended June 30:
                               
Revenues
 
$
17,739,624
   
$
15,681,668
   
$
2,057,956
     
13.1
%
Cost of revenues
   
6,588,564
     
6,479,434
     
109,130
     
1.7
%
    Gross profit
   
11,151,060
     
9,202,234
     
1,948,826
     
21.2
%
    Gross profit percentage
   
62.9
%
   
58.7
%
               

Net revenues for the three months ended June 30, 2012 were $9.1 million, an increase of $1.2 million, or 15.5% over the same period in 2012.  Net revenues for the six months ended June 30, 2012 were $17.7 million, an increase of $2.1million, or 13.1% over the same period in 2012.  Net revenues increased for the three and six months ended June 30, 2013 as a result of increased sales in Digital Phone Service, SIP Trunking Service and High Volume SIP Service offset by the a decline in Individual Services and Legacy business.
 
Cost of revenues for the three months ended June 30, 2013 were $3.4 million, an increase of $0.1 million, or 3.6%, over the same period in 2012. Cost of revenues for the six months ended June 30, 2012 were $6.6 million, an increase of $0.1 million, or 1.7% over the same period in 2012.  Cost of revenues increased proportionately to our growth in revenues.

Gross profit for the three months ended June 30, 2013 was $5.7 million, an increase of $1.1 million, or 24.2%, over the same period in 2012.  Gross profit for the six months ended June 30, 2013 was $11.2 million, an increase $1.9 million, or 21.2% over the same period in 2012.  Gross profit percentage was 62.9% for the six months ended June 30, 2013 as compared to 58.7% in the same period in 2012.
 
  Selling and Marketing Expenses
 
Selling and marketing expenses for the three months ended June 30, 2013 were $2.0 million, an increase of $0.4 million or 21.5%, over the same period in 2012.  Selling and marketing expenses for the six months ended June 30, 2013 were $3.9 million, an increase of $0.6 million or 16.6%, over the same period in 2012.  We anticipate that selling and marketing expenses for fiscal year 2013 will be higher than those incurred in fiscal year 2012 as we look to increase our advertising expense in our effort to increase market share and to promote our Digital Phone Service, SIP Trunking Service, and Individualized Services product lines.
 
General and Administrative Expenses
 
General and administrative expenses for the three months ended June 30, 2013 were $1.8 million, a decrease of less than $0.1 million or less than 1.0%, over the same period in 2012.  General and administrative expenses for the six months ended June 30, 2013 were $4.6 million. an increase of $0.9 million or 23.7% over the same period in 2012.  The increase was related to transaction related costs.  
 
 
Research, Development and Engineering Expenses
 
Research, development and engineering expenses for the both the three months ended June 30, 2013 and June 30, 2012 were $0.5 million.  Research, development and engineering expenses for the six months ended June 30, 2013 and June 30, 2012 were $0.9 million and $1.0 million, respectively.  
 
Depreciation Expense
 
Depreciation expense for the three months ended June 30, 2013 and June 30, 2012 was $0.2 million.  Depreciation for the six months ended June 30,2013and June 30, 2012 was $0.3 million.

Amortization of Purchased Intangibles
 
We recorded $0.2 million of amortization expense in the three months ended June 30, 2013 a decrease of $0.4 million or 65% over the same period in 2012.  We recorded $0.4 million of amortization expense in the six months ended June 30, 2013, a decrease of $0.7 million or 65% over the same period in 2012 related to the amortization of intangible assets acquired in the AccessLine acquisition.

Interest Expense
 
Interest expense was $0.2 and $0.6 million for the three months ended June 30, 2013 and 2012 respectively.  Interest expense was $0.3 and $1.3 million for the six months ended June 30, 2013 and 2012 respectively.  Interest expense includes stated interest, amortization of note discounts, amortization of deferred financing costs, and interest on capital leases.
 
Provision for Income Taxes
 
No provision for income taxes has been recorded because we have experienced net losses from inception through June 30, 2013. As of December 31, 2012, we had net operating loss carry forwards (“NOL’s”), net of Section 382 limitations, of approximately $8.1 million, some of which, if not utilized, will begin expiring in the current year. Our ability to utilize the NOL carry forwards is dependent upon generating taxable income.  We have recorded a corresponding valuation allowance to offset the deferred tax assets as it is more likely than not that the deferred tax assets will not be realized.

Net Income (Loss)

Our net income for the three months ended June 30, 2013 was $869,473, compared with a net loss of $802,181 for the three months ended June 30, 2012, an increase in our quarterly net income of $1.7 million over the comparable period of a year ago.  Our net income for the six months ended June 30, 2013 was $629,039, compared with a net loss of $1.66 million, an increase in our year to date net income of $2.3 million over the comparable period a year ago.

Liquidity and Capital Resources

At June 30, 2013, we had cash of $2.1 million, accounts receivable of $2.7 million and a working capital deficit of $3.0 million. However, current liabilities include certain items that will likely settle without future cash payments or otherwise not require significant expenditures by the Company including: deferred revenue of $1.0 million (primarily deferred up front customer activation fees) and accrued vacation of $0.6 million. The aforementioned items represent $1.6 million of total current liabilities as of June 30, 2013. We do not anticipate being in a positive working capital position in the near future.  

However, based on our projected 2013 results and, if necessary, our ability to reduce certain variable operating expenses, we believe that our existing capital, together with anticipated cash flows from operations, will be sufficient to finance our operations through at least July 1, 2014.

In December of 2012, we refinanced the balance of our term debt in connection with our “2010 notes”. The Loan Agreement provided the Company a term loan in the principal amount of $7,500,000 with principal and interest payable on a monthly basis over four years subject to the terms of a Promissory Note by the Company in favor of East West Bank (the "East West Note"). In connection with the East West Note, we entered into a revolving line of credit of up to $1.0 million based on the Company’s eligible accounts receivable.   

Net cash used by investing activities during the six months ended June 30, 2013 was $0.4 million, which consisted primarily of purchases of property and equipment.
 
Net cash used by financing activities was $0.8 million during the six months ended June 30, 2013, $0.4 million of which was related to payments on our capital leases, $0.8 million was related to payment on the Loan Agreement, and $0.4 million was provided through the revolving line of credit.
 
 
If we can continue to generate revenue and gross profit in our Digital Phone Service and SIP Trunking Service products consistent with our growth in 2012, and we continue to maintain control of our variable operating expenses, we believe that our existing capital, together with anticipated cash flows from operations, will be sufficient to finance our operations through July 1, 2014.

If our cash reserves prove insufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other equity or debt securities.  However, there are no commitments or arrangements for future financings in place at this time, and we can give no assurance that such capital will be available on favorable terms or at all.  We may need additional financing thereafter until we can achieve profitability.  If we cannot, we will be forced to curtail our operations or possibly be forced to evaluate a sale or liquidation of our assets.  Any future financing may involve substantial dilution to existing investors.
 
The East West loan is secured by a lien on all of our assets, and the terms of such notes restrict our ability to borrow funds, pledge our assets as security for any such borrowing or raise additional capital by selling shares of capital stock or other equity or debt securities, without their consent.

Commitments and Contingencies
 
Leases

We have non-cancelable operating and capital leases for corporate facilities and equipment.
 
Future minimum rental payments required under non-cancelable operating and capital leases are as follows:

   
Operating Leases
   
Capital Leases
 
                 
2013
  $
437,869
    $
554,231
 
2014
   
474,016
     
1,072,814
 
2015
   
96,554
     
636,218
 
2016
           
80,333
 
2017
           
8,922
 
Total minimum lease payments
 
$
1,008,439
    $
2,352,518
 
Less amount representing interest
           
(190,624
)
Present value of minimum lease payments
           
2,161,894
 
Less current portion
           
(965,053
)
           
$
1,196,841
 
 
Loan Agreement

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

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

Aggregate annual principal payments of long-term debt for the period ending December 31:

   
Loan Agreement
 
2013
 
$
1,500,000
 
2014
   
1,500,000
 
2015
   
1,500,000
 
2016
   
2,650,000
 
Total payments
 
$
7,150,000
 

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

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

In addition, the Second Amendment provides that, beginning on December 1 of each year starting with 2013, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days.

There was $0.4 million outstanding under the Line of Credit as of June 30, 2013.

Repayment of Note Obligations

On December 14, 2012, using proceeds of the term loan evidenced by the Loan Agreement and East West Note, Senior Secured Notes of Telanetix (and guaranteed by the other Borrowers) respectively in favor of HCP-TELA, LLC ("HCP"), EREF-TELA, LLC ("EREF"), and CBG-TELA, LLC ("CBG") (collectively, the "Lenders") in the original aggregate principal amount of $10,500,000 (collectively, the "2010 Notes") purchased by the Lenders pursuant to that certain Securities Purchase Agreement, dated as of June 30, 2010, by and among Telanetix and the Lenders, were paid in full.  In connection with the payment in full of the 2010 Notes, which contractually were not prepayable, an Event of Default Redemption Price (as defined in each 2010 Note) was required to be paid.  Accordingly, on December 14, 2012, the Borrowers executed and delivered Subordinated Promissory Notes to the Lenders in the aggregate original principal amount of $1,726,660 (collectively, the "Subordinated Notes").  The unpaid balance of the Subordinated Notes accrues interest at the Applicable Interest Rate.  The principal and all accrued and unpaid interest under the Subordinated Notes are to be paid on the earliest of (a) June 14, 2017, (b) the date of the acceleration of the Subordinated Notes in accordance with the terms of the Subordinated Notes, or (c) the date of the payment in full of all obligations under the East West Note.  The obligations of the Borrowers under the Subordinated Notes are secured by security interests in substantially all of the Borrowers' assets, with HCP serving as collateral agent for the Lenders, which were granted pursuant to a Security Agreement dated December 14, 2012 between the Borrowers and HCP, as collateral agent for the Lenders (the "Security Agreement").  The Security Agreement contains many of the same affirmative and negative covenants as the Loan Agreement, but does not contain any financial covenants. 
 
As a condition precedent to East West making the term loan discussed above, the Lenders and HCP, as collateral agent for the Lenders, were required to enter into a Subordination and Intercreditor Agreement (the "Subordination Agreement") with East West (which was acknowledged by the Borrowers) pursuant to which the Borrowers' obligations to the Lenders under the Subordinated Notes (and all liens and security interests granted by the Borrowers to secure those obligations) were subordinated to the obligations of the Borrowers to East West (and all liens and security interests granted by the Borrowers to secure the obligations of  the Borrowers to East West).  Under the Subordination Agreement, payments cannot be made or received under the Subordinated Notes, the Lenders cannot commence any action to collect on the obligations under the Subordinated Notes, and the Lenders and HCP, as collateral agent, cannot take any Enforcement Action (as defined in the Subordination Agreement) with respect to their collateral until the East West obligations are paid in full.
 
 
Minimum Third Party Network Service Provider Commitments
 
We have a contract with a third party network service provider that facilitates interconnectivity with a number of third party network service providers.  The contract contains a minimum usage guarantee of $0.2 million per monthly billing cycle and expires is on a month to month basis.    The cancellation terms are month to month.

Critical Accounting Policies Involving Management Estimates and Assumptions
 
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements.  The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense, the valuation of warrants and conversion features; and other contingencies.  We evaluate our estimates on an ongoing basis.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions.
 
There have been no material changes to our critical accounting policies, estimates, or judgments from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.  The following is a discussion of certain of the accounting policies that require management to make estimates and assumptions where the impact of those estimates and assumptions may have a substantial impact on our financial position and results of operations.

 Internally Developed Software:
 
The Company capitalizes payroll and related costs that are directly attributable to the design, coding, and testing of the Company's software developed for internal use.   Internally developed software costs, which are included in property and equipment, are amortized on a straight-line basis over an estimated useful life of two years.  
 
Goodwill:
 
Goodwill is not amortized but is regularly reviewed for potential impairment.  The identification and measurement of goodwill impairment involves the estimation of the fair value of our reporting units.  The estimates of fair value of reporting units are based on the best information available as of the date of the assessment, which primarily incorporate management assumptions about expected future cash flows.  Future cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities.
 
Impairment of Long-Lived Assets:
 
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to ten years.  Purchased intangible assets determined to have indefinite useful lives are not amortized.  Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.  Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
 
Revenue Recognition:
 
Revenues from continuing operations are derived primarily from monthly recurring fees, which are recognized over the month the service is provided, activation fees, which are deferred and recognized over the estimated life of the customer relationship, and fees from usage, which are recognized as the service is provided.
 
Income Taxes:
 
We account for income taxes using the asset and liability method, which recognizes deferred tax assets and liabilities determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income.  Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized.  In addition, FASB guidance requires us to recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained.
 
 
Derivative Financial Instruments
 
We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
 
We review the terms of convertible debt and equity instruments the Company issues to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument.  In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.  Also, in connection with the sale of convertible debt and equity instruments, we may issue freestanding warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity.
 
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense.  When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments.  The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount.
 
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, using the effective interest method.
 
Stock Based Compensation:
 
We measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost is recognized in the Consolidated Statement of Operations over the period during which the employee is required to provide service in exchange for the award – the requisite service period.  No compensation cost is recognized for equity instruments for which employees do not render the requisite service.  The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models adjusted for the unique characteristics of those instruments. 
 
Recent Accounting Pronouncements
 
See “Note 2 – Basis of Presentation” of the Notes to the Condensed Consolidated Financial Statements included in "Item 1. Financial Statements” of Part I of this report.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act.
 
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Under the rules and regulations of the Securities and Exchange Commission, as a smaller reporting company we are not required to provide the information required by this Item.
 
Item 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our disclosure controls and procedures are designed to provide reasonable assurances that material information related to our company is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information 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. Our Chief Executive Officer and Chief Financial Officer have determined that as of June 30, 2013, our disclosure controls were effective at that "reasonable assurance" level.
 
Changes In Internal Controls over Financial Reporting.
 
No changes were made in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II – OTHER INFORMATION
 
Item 1. LEGAL PROCEEDINGS
 
 From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief.  The amount of the ultimate liability, if any, from such claims cannot be determined.  However, in the opinion of our management, there are no legal claims currently pending or threatened against us that would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
 
Item 1A. RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in "Part I. Item 1A—Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The risks and uncertainties described in such risk factors and elsewhere in this report have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects. As of the date of this report, we do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
Item 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
Item 4. MINE SAFETY DISCLOSURES

None.
 
Item 5. OTHER INFORMATION
 
None.
 
Item 6. EXHIBITS
 
See the exhibit index immediately following the signature page of this report.
 
 
 
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.
 
 
 
TELANETIX, INC.
 
 
/s/ Paul C. Bogonis
Date: August 16, 2013
Paul C. Bogonis, Chief Financial Officer
 
(Duly Authorized Officer and Principal Financial Officer)
 
 
 
 
 
 
 
Exhibit No.
 
Description
2.1
 
 
Amendment, dated as of May 8, 2013, to Agreement and Plan of Merger, dated as of January 18, 2013, by and among the Company, Intermedia Holdings, Inc. and Sierra Merger Sub Co. (incorporated by reference to Exhibit 2.1 to the registrant's Form 8-K filed May 8, 2013).
 
10.1
 
Second Amendment to Loan and Security Agreement, dated as of April 11, 2013, by and among the Company, Telanetix, Inc., a California corporation, AccessLine Holdings, Inc. and AccessLine Communications Corporation and East West Bank (incorporated by reference to Exhibit 10.1 to the registrant's Form 8-K filed April 15, 2013). 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101.INS*
 
XBRL Instance Document
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE*
 
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
 
32

 
 
EX-31.1 2 ex31-1.htm ex31-1.htm
Exhibit 31.1
 
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Douglas N. Johnson, certify that:
 
1.            I have reviewed this quarterly report on Form 10-Q of Telanetix, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
   
Date: August 16, 2013
/s/ Douglas N. Johnson
 
Douglas N. Johnson, Chief Executive Officer
 
(Principal Executive Officer)



EX-31.2 3 ex31-2.htm ex31-2.htm
Exhibit 31.2
 
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Paul C. Bogonis, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Telanetix, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
 
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
   
Date: August 16, 2013
/s/ Paul C. Bogonis
 
Paul C. Bogonis, Chief Financial Officer
 
(Principal Accounting Officer)


EX-32.1 4 ex32-1.htm ex32-1.htm
Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Telanetix, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
(a)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(b)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: August 16, 2013
/s/ Douglas N. Johnson
 
Douglas N. Johnson, Chief Executive Officer
 
(Principal Executive Officer)



EX-32.2 5 ex32-2.htm ex32-2.htm
Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Telanetix, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
1.           The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date: August 16, 2013
/s/ Paul C. Bogonis
 
Paul C. Bogonis, Chief Financial Officer
 
(Principal Accounting Officer)



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FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">1.&#160;&#160;&#160;Description of Business</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">We are a cloud based IP voice services company.&#160;&#160;Our company is built on the belief that business telecommunication need not be expensive or complicated. &#160;Through our AccessLine-branded Voice Services, we provide customers with a range of business phone services and applications that are easy to purchase, easy to install, easy to use and most importantly provide significant savings.&#160;&#160;Our customers have the ability to easily configure their service to meet the unique needs of their business.&#160;&#160;At the core of our cloud based, hosted service is our proprietary software, which is developed internally and runs on standard commercial grade servers.&#160;&#160;By delivering business phone service to the market in this manner, our Voice Services offer flexibility and ease of use to any sized business customer, at an affordable price point.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">AccessLine offers the following cloud based, hosted Voice over IP services: Digital Phone System (DPS), SIP Trunking Service and a la carte, individual phone services.&#160;&#160;DPS replaces a customer's existing telephone lines and phone system with a Voice over IP alternative. It is sold as a complete turn-key solution where we bundle business-class phone equipment which is manufactured by third parties, along with our reliable voice network services.&#160;&#160;This service is primarily targeted at small businesses looking for a fully integrated solution that does not require expert assistance to install or manage.&#160;&#160;SIP Trunking Service replaces high-cost telephone lines with a low cost yet high quality IP alternative.&#160;&#160;SIP Trunking is for larger businesses that already have their own on premise equipment (PBX) and is targeted at those businesses with large calling volumes looking for cost effective alternatives to traditional carrier offerings. SIP Trunking Service can support businesses with hundreds to thousands of employees.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">AccessLine-branded services also offer a la carte phone services and features including conferencing calling services, find-me and follow-me services, toll-free services, and automated attendant service.&#160;&#160;Each a la carte service can be purchased individually through AccessLine&#8217;s various websites.&#160;&#160;All services include easy-to-use web interfaces for simple management and customizations.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Our revenues principally consist of: monthly recurring fees, activation, and usage fees from the communication services and the solutions outlined above. There are some ancillary one time equipment charges associated with our DPS solution.</font> </div><br/> <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">2. Basis of Presentation</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The accompanying unaudited financial statements, consisting of the consolidated balance sheet as of June 30, 2013, the consolidated statements of operations for the six months ended June 30, 2013 and 2012, and the consolidated statements of cash flows for the three and six months ended June 30, 2013 and 2012, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.&#160;&#160;For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.&#160;&#160;Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense; the valuation of conversion features; and other contingencies.&#160;&#160;Management evaluates these estimates on an on-going basis.&#160;&#160;Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.&#160;&#160;Actual results could differ from those estimates under different assumptions or conditions. 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However, current liabilities include certain items that will likely settle without future cash payments or otherwise not require significant expenditures by the Company including: deferred revenue of $1.0 million (primarily deferred up front customer activation fees) and accrued vacation of $0.6 million. The aforementioned items represent $1.6 million of total current liabilities as of June 30, 2013. We do not anticipate being in a positive working capital position in the near future.&#160;&#160;</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">However, based on our projected 2013 results and, if necessary, our ability to reduce certain variable operating expenses, we believe that our existing capital, together with anticipated cash flows from operations, will be sufficient to finance our operations through at least July 1, 2014.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">If our cash reserves prove insufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other equity or debt securities.&#160;&#160;However, there are no commitments or arrangements for future financings in place at this time, and we can give no assurance that such capital will be available on favorable terms or at all.&#160;&#160;We may need additional financing thereafter until we can achieve profitability.&#160;&#160;If we cannot, we will be forced to curtail our operations or possibly be forced to evaluate a sale or liquidation of our assets.&#160;&#160;Any future financing may involve substantial dilution to existing investors.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Our loan with East West Bank is secured by a lien on all of our assets, and the terms of such notes restrict our ability to borrow funds, pledge our assets as security for any such borrowing or raise additional capital by selling shares of capital stock or other equity or debt securities, without their consent.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In December of 2012, we refinanced the balance of our term debt in connection with our &#8220;2010 notes&#8221;. The Loan Agreement provided the Company a term loan in the principal amount of $7,500,000 with principal and interest payable on a monthly basis over four years subject to the terms of a Promissory Note by the Company in favor of East West Bank (the "<font style="DISPLAY: inline; TEXT-DECORATION: underline">East West Note</font>").<font style="FONT-STYLE: italic; DISPLAY: inline; FONT-WEIGHT: bold">&#160;</font>In connection with the East West Note, we entered into a revolving line of credit of up to $1M based on the Company&#8217;s eligible accounts receivable.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On April 11, 2013, Telanetix, Inc., a Delaware corporation (&#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Telanetix</font>&#8221;), entered into a Second Amendment to Loan and Security Agreement (the &#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Second Amendment</font>&#8221;) by and among itself, its direct and indirect subsidiaries (together with Telanetix, the &#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Borrowers</font>&#8221;), and East West Bank (&#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">East West</font>&#8221;), which amended that certain Loan and Security Agreement, dated as of December 14, 2012, by and among the Borrowers and East West, as amended by that certain Amendment to Loan and Security Agreement dated as of January 16, 2013 (the &#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Loan Agreement</font>&#8221;).</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Second Amendment eliminates the requirement of a Borrowing Base for the $1,000,000 line of credit established by East West to the Borrowers under the Loan Agreement (the &#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Line of Credit</font>&#8221;).&#160;&#160;Prior to the Second Amendment, the aggregate amount of advances outstanding at any time under the Line of Credit could not exceed the Borrowing Base, which was the lesser of (1) $1,000,000 or (2) 75% of the aggregate of Eligible Accounts, provided, however, prior to East West&#8217;s receipt of a satisfactory collateral exam prior to January 31, 2013, the Borrowing Base was limited to the lesser of (1) $300,000 or (2) 75% of the aggregate amount of Eligible Accounts.&#160;&#160;&#8220;Eligible Accounts&#8221; was defined as the Borrowers&#8217; accounts subject to the exceptions detailed in the Loan Agreement.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In addition, the Second Amendment provides that, beginning on December 1 of each year starting with 2013, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days.</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">There was $0.4 million outstanding under the Line of Credit as of June 30, 2013.</font> </div><br/> 3000000 600000 1600000 400000 <div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">3. Recapitalization</font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="FONT-STYLE: italic; DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline; TEXT-DECORATION: underline">Debenture Repurchase</font></font> </div><br/><div style="TEXT-ALIGN: justify; TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On June 30, 2010, the Company entered into a securities purchase agreement with the holders of its outstanding debentures in the principal amount of $29.6 million. Under the terms of the agreement, the Company repurchased all of its outstanding debentures in exchange for payment of $7.5 million in cash, the holders of the Company's debentures exchanged all outstanding warrants they held for shares of the Company's common stock, and the Company issued to such holders an additional number of shares of common stock such that the holders collectively beneficially owned approximately 221,333 shares of common stock immediately following the completion of the transactions contemplated by the agreement. The Company paid the $7.5 million from the proceeds of its senior secured note private placement described below.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">After giving effect to the transactions contemplated by the debenture repurchase described above and the transactions contemplated by the senior secured note private placement described below, the Company had $10.5 million of senior secured notes outstanding and all of its previously issued debentures, which had a principal amount of $29.6 million, were cancelled.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="FONT-STYLE: italic; DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline; TEXT-DECORATION: underline">Senior Secured Note&#160;Private Placement</font></font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On June&#160;30, 2010, the Company entered into a securities purchase agreement (the "Hale Securities Purchase Agreement") with affiliates of Hale Capital Management, LP (collectively, "Hale"), pursuant to which in exchange for $10.5 million, the Company issued to Hale $10.5 million of senior secured notes (the "2010 Notes"), and 3,833,356 shares of its common stock.&#160;&#160;The carrying value assigned to the debt and equity was based on the relative fair value of each component as determined by a third party valuation specialist.&#160;&#160;The allocation between debt and equity resulted in a $5.7 million debt discount which was to be amortized over the term of the 2010 Notes using the effective interest method.&#160;&#160;A summary of the material terms of the 2010 Notes is set forth in Note 4&#8212;2010 Notes, below.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Under the terms of the Hale Securities Purchase Agreement, the Company agreed to conduct a rights offering.&#160;&#160;In connection with the rights offering, depending on the amount of capital it raised, the Company and Hale agreed that the Company would either redeem up to $3.0 million of principal of the 2010 Notes or that Hale would exchange up to $3.0 million of principal of the 2010 Notes for shares of the Company's common stock.&#160;&#160;As discussed below the Company has cancelled the rights offering and no longer has any obligation to conduct the same.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In August 2011, the independent directors of the Company approved, and the Company and Hale&#160;entered into a settlement agreement, pursuant to which&#160;(1)&#160;Hale released the Company from any obligation to conduct the rights offering, and (2)&#160;the Company released&#160;Hale from its "backstop"&#160;obligation to convert up to $3.0 million of the&#160;2010 Notes&#160;into&#160;common&#160;stock.&#160; As a result of the amendment, the original principal amount of&#160;the 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through&#160;December 31, 2012.&#160;&#160;In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million of&#160;principal (plus associated &#8220;PIK Interest&#8221;) through June 30, 2012 and to have any such amounts added to principal.&#160; On December 14, 2012 the senior secured notes were paid in full.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Company agreed to a number of provisions in the Hale Securities Purchase Agreement that protect Hale's investment, including:</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Most Favored Nation</font>.&#160;&#160;For so long as the 2010 Notes were outstanding and until Hale ceased to own at least ten percent of the Company's outstanding common stock, if the Company (i)&#160;issued debt on terms that are more favorable than the terms of the 2010 Notes, or (ii)&#160;issued common stock, preferred stock, equivalents or any other equity security on terms more favorable than those set out in the Hale Securities Purchase Agreement, then the terms of the 2010 Notes and/or the Hale Securities Purchase Agreement would have automatically become amended such that Hale would have received the benefit of the more favorable terms.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Right of First Refusal</font>.&#160;&#160;For so long as the 2010 Notes were outstanding and until Hale ceased to own at least ten percent of the Company's outstanding common stock, Hale had a right of first refusal on any subsequent placement that the Company were to make of common stock or common stock equivalents or any securities convertible into or exchangeable or exercisable for shares of its common stock.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Fundamental Transactions</font>.&#160;&#160;For so long as the 2010 Notes were outstanding, and thereafter for as long as any of the Hale purchasers continued to own at least twenty percent of the common stock that they purchased under the Hale Securities Purchase Agreement, the Company could not effect a transaction in which it consolidated or merged with another entity, conveyed all or substantially all of its assets, permitted another person or group to acquire more than fifty percent of its voting stock, or reorganized or reclassified its common stock without the majority consent of Hale.&#160;&#160;Additionally, the Company could not have effected such a transaction without obtaining the foregoing requisite consent if such transaction would have triggered the most favored nation provision in the Hale Securities Purchase Agreement described above or if such transaction would otherwise involved the issuance of any equity securities or the incurrence of debt at a price that would have been less than the price paid in connection with the transaction consummated pursuant under the Hale Securities Purchase Agreement.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In December of 2012, the 2010 Notes were fully paid and discharged.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Post-Closing Adjustment Shares</font>.&#160; If at any time prior to July&#160;2, 2012, the Company were required to make payment on certain identified contingent liabilities up to an aggregate amount of $464,831, then it would have been obligated to issue additional shares of common stock to Hale, such that the total percentage ownership of its fully diluted common stock immediately after the payment of such liabilities would equal the same percentage ownership that Hale would have had if the contingent payable had been paid prior to the closing under the Hale Securities Purchase Agreement.&#160;&#160;To date $464,831 of these contingent liabilities have been incurred as expenses.&#160;&#160;Accordingly, in April of 2011 we issued to Hale an additional 225,576 shares of our common stock under the terms of the Hale Securities Purchase Agreement.&#160;&#160;As anticipated in our quarterly report on Form 10-Q for the quarter ended September 30, 2012, on November 16, 2012 we issued Hale the remaining 300,004 shares of common stock as final settlement of the contingent liabilities.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="FONT-STYLE: italic; DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline; TEXT-DECORATION: underline">Registration Rights Agreement</font></font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In connection with the Hale Securities Purchase Agreement, the Company entered into a registration rights agreement with Hale pursuant to which the Company agreed to file a registration statement with the SEC for the resale of the shares issued and issuable to Hale under the Hale Securities Purchase Agreement.&#160;&#160;The Company filed the registration statement with the SEC on September 30, 2010. The registration rights agreement contained penalty provisions in the event that the Company failed to secure the effectiveness of the registration statement by November 29, 2010, or failed to file other registration statements the Company is required to file under the terms of the registration rights agreement in a timely manner, or if the Company failed to maintain the effectiveness of any registration statement it was required to file under the terms of the registration rights agreement until the shares issued to Hale had been sold or could have been sold under Rule 144 without restriction or limitation (including volume restrictions) and without the requirement that the Company be in compliance with Rule 144(c)(1).&#160;&#160;In the event of any such failure, and in addition to other remedies available to Hale, the Company agreed to pay Hale as liquidated damages an amount equal to 1% of the purchase price for the shares to be registered in such registration statement.&#160;&#160;Such payments were due on the date we failed to comply with our obligation and every 30th day thereafter (pro-rated for periods totaling less than 30 days) until such failure had been cured.&#160;&#160;The registration statement covering the resale of the shares issued to Hale was never declared effective. &#160;Hale and the Company had agreed to amend the term &#8220;Initial Effectiveness Deadline&#8221; set forth in Section 1(o) of the Registration Rights Agreement to read in its entirety as follows &#8220;&#8216;Initial Effectiveness Deadline&#8217; means December 31, 2013.&#8221;</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="FONT-STYLE: italic; DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><font style="DISPLAY: inline; TEXT-DECORATION: underline">Impact of Debenture Repurchase and Senior Secured Note&#160;Private Placement</font></font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In connection with the Hale Securities Purchase Agreement, on July&#160;2, 2010, the Company received gross proceeds of $10.5 million.&#160;&#160;The Company incurred expenses of approximately $1.5 million in connection with the transactions contemplated by the Hale Securities Purchase Agreement, resulting in net proceeds of approximately $9.0 million.&#160;&#160;The Company used $7.5 million of these proceeds to repurchase its outstanding debentures and allotted the remaining $1.5 million for working capital purposes, including advertising and distribution programs for its Digital Phone Service products.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">Merriman Curhan Ford acted as the Company's financial advisor in the transaction and was paid a fee of $682,500 in connection with the transaction.&#160;&#160;The Company also issued to Merriman Curhan Ford warrants to purchase 31,152 shares of its common stock.&#160;&#160;The warrants are exercisable at $2.889 per share for a period of 5 years.&#160;&#160;During the quarter ended June 30, 2013, Merriman Curhan Ford exercised the 31,152 warrants.</font> </div><br/> 29600000 7500000 221333 10500000 3833356 5700000 3000000 3000000 464831 464831 225576 300004 0.01 1500000 9000000 1500000 $682,500 31152 2.889 P5Y 31152 <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">4. The 2010 Notes</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The following summarizes other terms of the 2010 Notes:</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Term</font>.&#160;&#160;The 2010 Notes were due and payable on July&#160;2, 2014.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Interest</font>.&#160;&#160;Interest accrued at a rate equal to the prime rate as published in The Wall Street Journal as of the first business day of each interest period plus 4.75% per annum and was payable at the end of each month, with the first payment due on July&#160;31, 2010.&#160;&#160;Through June&#160;30, 2011, the Company had the option to defer the monthly interest payments otherwise due and have the amount of deferred interest added to the principal balance of the 2010 Notes.&#160;&#160;In connection with the August 2011 amendment to the 2010 Notes, through June 30, 2012, the Company had the option to defer the monthly interest payments otherwise due on $3.0 million of the 2010 Notes and to have any such amount of deferred interest added to the principal balance of the 2010 Notes.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Principal Payment</font>.&#160;&#160;In July&#160;2011, and continuing for the 11 months thereafter, principal payments of $200,000 per month were due on the last day of each month.&#160;&#160;Thereafter, the Company was required to pay principal in a monthly amount equal to the sum of (a)&#160;$383,702 and (b)&#160;the quotient determined by dividing the (i)&#160;aggregate amount of interest added to the principal amount by (ii)&#160;24.&#160;&#160;Any remaining principal amount, if not paid earlier, was due and payable on July&#160;2, 2014.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">August 2011 Amendment</font>.&#160;&#160;As discussed in more detail below under the heading entitled, "Rights Offering," the Company had the right to redeem up to $3.0 million of the 2010 Notes prior to maturity.&#160;&#160;In August 2011, the Company and Hale amended the Hale Securities Purchase Agreement to (1) cancel the Company's obligation to conduct the rights offering, and (2) cancel Hale&#8217;s obligation to convert up to $3.0 million of the&#160;2010 Notes&#160;into&#160;common&#160;stock.&#160; As a result of the amendment, the original principal amount of&#160;the 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through June 30, 2012.&#160;&#160;The Company's scheduled payment obligations under the&#160;2010 Notes averaged approximately $343,000 per month&#160;through December 31, 2012.&#160;&#160;On December 14, 2012 the 2010 Notes were paid in full.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">No Conversion Rights</font>.&#160;&#160;The 2010 Notes were not convertible.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="FONT-STYLE: italic; DISPLAY: inline">Security</font>.&#160;&#160;The 2010 Notes were secured by all of the Company's assets under the terms of a pledge and security agreement that the Company and its subsidiaries entered into with Hale.&#160;&#160;Each of the Company's subsidiaries also entered into guarantees in favor of Hale pursuant to which each subsidiary guaranteed the complete payment and performance by the Company of its obligations under the 2010 Notes and related agreements.</font> </div><br/><div style="TEXT-INDENT: 36pt; 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Under the terms of the 2010 Notes, the Company agreed to use the gross proceeds of the rights offering to redeem an aggregate of up to $3.0 million of principal amount of the 2010 Notes. To the extent the gross proceeds of the rights offering were less than $3.0 million, the Company and Hale agreed that Hale would exchange the principal amount to be redeemed (up to $3.0 million) for shares of our common stock at an exchange price equal to the subscription price of the subscription rights.&#160;&#160;The Company paid Hale an aggregate of $60,000 in consideration of the foregoing. In addition, the Company agreed to pay Hale upon completion of the rights offering an amount of cash equal to the accrued and unpaid interest in respect of the principal amount of the 2010 Notes redeemed or exchanged for shares of common stock in connection with the rights offering.&#160;&#160;As discussed below the Company has cancelled the rights offering and related obligations.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">In August 2011, the independent directors of the Company approved, and the Company and Hale&#160;entered into a settlement agreement, pursuant to which&#160;(1)&#160;Hale released the Company from any obligation to conduct the rights offering, and (2)&#160;the Company released&#160;Hale from its "backstop"&#160;obligation to convert up to $3.0 million of the&#160;2010 Notes&#160;into&#160;common&#160;stock.&#160; As a result of the amendment, the original principal amount of&#160;the 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal through&#160;December 31, 2012.&#160;&#160;In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million of&#160;principal (plus associated &#8220;PIK Interest&#8221;) through June 30, 2012 and to have any such amounts added to principal.&#160; The Company's scheduled payment obligations under the&#160;2010 Notes, assuming that it paid all of the interest current,&#160;would have averaged approximately $343,000 per month&#160;through December 31, 2012.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The value assigned to the debt and related discount and equity associated with issuance of the Recapitalization were calculated by an independent valuation firm using relative fair values.</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The 2010 Notes were paid off in full on December 14, 2012 with the proceeds from the Loan Agreement.</font> </div><br/> prime rate as published in The Wall Street Journal as of the first business day of each interest period plus 4.75% per annum 3000000 200000 Company was required to pay principal in a monthly amount equal to the sum of (a)$383,702 and (b)the quotient determined by dividing the (i)aggregate amount of interest added to the principal amount by (ii)24.Any remaining principal amount, if not paid earlier, was due and payable on July2, 2014 383702 failure to make a payment obligation under the 2010 Notes, failure to pay other indebtedness when due if the amount exceeded $250,000, bankruptcy, entry of a judgment against the Company in excess of $250,000 which was not discharged or covered by insurance,failure to observe other covenants of the 2010 Notes or related agreements (subject to applicable cure periods), breach of a representation or warranty, failure of Hale's security documents to be binding and enforceable, and casualty loss of any of the Company's assets that would have a material adverse effect on its business, and failure to meet 80% of quarterly financial targets from its annual operating budget, including cash, revenues and EBITDA.In the event of default, additional default interest of 4% would have accrued on the outstanding balance.In addition, in the event of default, the Company could have been required to redeem all or any portion of the 2010 Notes at a price equal to 125% of the sum of the principal amount that such holder requests that it redeem, plus accrued but unpaid interest on such principal amount, plus any accrued and unpaid late charges with respect to such principal and interest. The Company was required to obtain the consent of the holders of the 2010 Notes representing at least a majority of the aggregate principal amount of the 2010 Notes then outstanding in order to enter into a change of control transaction.If such consent were obtained, the holders of the 2010 Notes may have required the Company to redeem all or any portion of such notes at a price equal to 125% of the sum of the principal amount that such holder requested that it redeem, plus accrued but unpaid interest on such principal amount, plus any accrued and unpaid late charges with respect to such principal and interest. 1038414 2.889 3000000 60000 1)Hale released the Company from any obligation to conduct the rights offering, and (2)the Company releasedHale from its "backstop"obligation to convert up to $3.0 million of the2010 Notesintocommonstock. As a result of the amendment, the original principal amount ofthe 2010 Notes outstanding remained at approximately $10.5 million, plus interest that was accrued to principal throughDecember 31, 2012.In addition, under the settlement agreement, Hale granted the Company the right to defer cash payment of the interest on up to $3.0 million ofprincipal (plus associated "PIK Interest") through June 30, 2012 and to have any such amounts added to principal. 10500000 343000 <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">5. Loan Agreement</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On December 14, 2012, Telanetix, Inc., a Delaware corporation ("<font style="DISPLAY: inline; TEXT-DECORATION: underline">Telanetix</font>"), entered into a Loan and Security Agreement (the "<font style="DISPLAY: inline; TEXT-DECORATION: underline">Loan Agreement</font>") by and among itself, its direct and indirect subsidiaries (together with Telanetix, the "<font style="DISPLAY: inline; TEXT-DECORATION: underline">Borrowers</font>"), and East West Bank ("<font style="DISPLAY: inline; TEXT-DECORATION: underline">East West</font>").</font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The Loan Agreement provided the Borrowers a term loan in the principal amount of $7,500,000 with principal and interest payable on a monthly basis over four years subject to the terms of a Promissory Note by the Borrowers in favor of East West (the "<font style="DISPLAY: inline; 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Upon prepayment of the East West Note, the Borrowers are required to pay a premium equal to 1% of the original amount of the East West Note amount so prepaid if such prepayment occurs during the first year of the term of the East West Note.&#160; After the first year anniversary of the East West Note, there is no prepayment penalty.&#160; The indebtedness under the East West Note is secured by a security interest and lien on substantially all of the Borrowers' assets.&#160; The Loan Agreement contains customary affirmative and negative covenants.&#160;&#160;&#160; Among the affirmative covenants is a covenant that the Borrowers will maintain the following financial ratios: (1) a quarterly Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of not less than 1.25 to 1.00 through June 30, 2013, and 1.50 to 1.00 thereafter, (2) a quarterly EBITDA (as defined in the Loan Agreement) of $625,000 for Q4 2012, $725,000 for Q1 2013, and $875,000 thereafter, and (3) a maximum Senior Debt (as defined in the Loan Agreement) divided by trailing 12 months EBITDA of 2.50 to 1.00 through December 31, 2013, and 2.00 to 1.00 thereafter.</font> </div><br/><div style="TEXT-INDENT: 36pt; 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DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline; TEXT-DECORATION: underline">Second Amendment to Loan and Security Agreement</font></font> </div><br/><div style="TEXT-INDENT: 36pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On April 11, 2013, Telanetix, Inc., a Delaware corporation (&#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Telanetix</font>&#8221;), entered into a Second Amendment to Loan and Security Agreement (the &#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Second Amendment</font>&#8221;) by and among itself, its direct and indirect subsidiaries (together with Telanetix, the &#8220;<font style="DISPLAY: inline; TEXT-DECORATION: underline">Borrowers</font>&#8221;), and East West Bank (&#8220;<font style="DISPLAY: inline; 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Among the affirmative covenants is a covenant that the Borrowers will maintain the following financial ratios: (1) a quarterly Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of not less than 1.25 to 1.00 through June 30, 2013, and 1.50 to 1.00 thereafter, (2) a quarterly EBITDA (as defined in the Loan Agreement) of $625,000 for Q4 2012, $725,000 for Q1 2013, and $875,000 thereafter, and (3) a maximum Senior Debt (as defined in the Loan Agreement) divided by trailing 12 months EBITDA of 2.50 to 1.00 through December 31, 2013, and 2.00 to 1.00 thereafter The Second Amendment eliminates the requirement of a Borrowing Base for the $1,000,000 line of credit established by East West to the Borrowers under the Loan Agreement (the " Line of Credit ").Prior to the Second Amendment, the aggregate amount of advances outstanding at any time under the Line of Credit could not exceed the Borrowing Base, which was the lesser of (1) $1,000,000 or (2) 75% of the aggregate of Eligible Accounts, provided, however, prior to East West's receipt of a satisfactory collateral exam prior to January 31, 2013, the Borrowing Base was limited to the lesser of (1) $300,000 or (2) 75% of the aggregate amount of Eligible Accounts. beginning on December 1 of each year starting with 2013, the Borrowers will be required to repay all advances to the Borrowers under the Line of Credit and to maintain a balance of zero dollars for 30 consecutive days. 400000 Aggregate annual principal payments of long-term debt for the period ending December 31:<br /> <br /><table cellpadding="0" cellspacing="0" width="30%" style="FONT-FAMILY: times new roman; 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