10-Q 1 c649-20130930x10q.htm 10-Q bd771a4ebc6f4a4

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2013 

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

For the transition period from             to            

Commission file number 001-33391

 

DIALOGIC INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

 

Delaware

94-3409691

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

 

1504 McCarthy Boulevard

Milpitas, California 95035-7405

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

(408) 750-9400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨

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  ¨    No   x 

As of November 7, 2013, 16,179,809 shares of the registrant’s common stock were outstanding.

 

 

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

DIALOGIC INC

FORM 10-Q

For the Quarterly Period Ended September 30, 2013 

INDEX

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS 

 

Unaudited Condensed Consolidated Balance Sheets 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Unaudited Condensed Consolidated Statements of Cash Flows 

Notes to Unaudited Condensed Consolidated Financial Statements 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

24 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 

35 

ITEM 4. CONTROLS AND PROCEDURES 

35 

 

 

PART II. OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS 

37 

ITEM 1A. RISK FACTORS 

37 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

54 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

54 

ITEM 4. MINE SAFETY DISCLOSURES 

54 

ITEM 5. OTHER INFORMATION

54 

ITEM 6. EXHIBITS 

55 

SIGNATURE 

57 

 

 

 

2

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

Dialogic Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

September 30,

 

December 31,

 

2013

 

2012

 

(unaudited)

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

4,511 

 

$

6,501 

Restricted cash

 

1,180 

 

 

900 

Accounts receivable, net of allowance of $2,142 and $1,217, respectively

 

22,304 

 

 

32,422 

Inventory

 

6,396 

 

 

8,874 

Other current assets

 

6,855 

 

 

8,993 

Total current assets

 

41,246 

 

 

57,690 

Property and equipment, net

 

4,587 

 

 

5,978 

Intangible assets, net

 

20,656 

 

 

25,089 

Goodwill

 

31,223 

 

 

31,223 

Other assets

 

2,036 

 

 

2,147 

Total assets

$

99,748 

 

$

122,127 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

10,349 

 

$

16,994 

Accrued liabilities

 

13,352 

 

 

21,270 

Deferred revenue, current portion

 

13,989 

 

 

12,742 

Bank indebtedness

 

12,475 

 

 

11,717 

Income taxes payable

 

756 

 

 

1,007 

Total current liabilities

 

50,921 

 

 

63,730 

Long-term debt, related parties, net of discount

 

73,074 

 

 

66,536 

Warrants

 

594 

 

 

1,985 

Other long-term liabilities

 

5,707 

 

 

8,978 

Total liabilities

 

130,296 

 

 

141,229 

Commitments and contingencies

 

 

 

 

 

Preferred stock, $0.001 par value:

 

 

 

 

 

Authorized - 10,000,000 shares; Issued and outstanding - 1 share

 

 —

 

 

 —

Stockholders' deficit:

 

 

 

 

 

Common stock, $0.001 par value:

 

 

 

 

 

Authorized - 200,000,000 shares; Issued and outstanding

 

 

 

 

 

16,179,809 shares and 14,415,652  shares, respectively

 

16 

 

 

14 

Additional paid-in capital

 

262,893 

 

 

257,658 

Accumulated other comprehensive loss

 

(22,208)

 

 

(22,423)

Accumulated deficit

 

(271,249)

 

 

(254,351)

Total stockholders' deficit

 

(30,548)

 

 

(19,102)

Total liabilities and stockholders' deficit

$

99,748 

 

$

122,127 

 

 

 

 

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

 

3

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dialogic Inc.

Unaudited Condensed Consolidated Statements of Operations

and Comprehensive Income (Loss)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2013

 

2012

 

2013

 

2012

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Products

$

20,841 

 

$

33,837 

 

$

68,325 

 

$

93,279 

Services

 

9,366 

 

 

10,251 

 

 

26,752 

 

 

29,808 

Total revenue

 

30,207 

 

 

44,088 

 

 

95,077 

 

 

123,087 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Products

 

6,944 

 

 

11,654 

 

 

25,389 

 

 

38,329 

Services

 

3,986 

 

 

5,118 

 

 

12,930 

 

 

15,267 

Total cost of revenue

 

10,930 

 

 

16,772 

 

 

38,319 

 

 

53,596 

Gross profit

 

19,277 

 

 

27,316 

 

 

56,758 

 

 

69,491 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development, net

 

5,881 

 

 

9,266 

 

 

20,997 

 

 

33,459 

Sales and marketing

 

7,615 

 

 

9,261 

 

 

25,219 

 

 

31,935 

General and administrative

 

6,280 

 

 

7,375 

 

 

21,869 

 

 

23,766 

Restructuring charges, net

 

(2,323)

 

 

457 

 

 

(1,997)

 

 

4,760 

Total operating expenses

 

17,453 

 

 

26,359 

 

 

66,088 

 

 

93,920 

Income (loss) from operations

 

1,824 

 

 

957 

 

 

(9,330)

 

 

(24,429)

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

109 

 

 

242 

 

 

56 

 

 

95 

Interest expense

 

(2,620)

 

 

(1,792)

 

 

(7,519)

 

 

(8,836)

Change in fair value of warrants

 

118 

 

 

1,750 

 

 

1,391 

 

 

2,154 

Foreign exchange loss, net

 

(8)

 

 

(278)

 

 

(919)

 

 

(1,047)

Total other expense, net

 

(2,401)

 

 

(78)

 

 

(6,991)

 

 

(7,634)

(Loss) income before provision for income taxes

 

(577)

 

 

879 

 

 

(16,321)

 

 

(32,063)

Income tax provision

 

274 

 

 

56 

 

 

577 

 

 

304 

Net (loss) income

$

(851)

 

$

823 

 

$

(16,898)

 

$

(32,367)

Net (loss) income per share - basic and diluted

$

(0.05)

 

$

0.08 

 

$

(1.11)

 

$

(4.24)

Weighted average shares of common stock used in

 

 

 

 

 

 

 

 

 

 

 

calculation of net (loss) income per share - basic and diluted

 

16,046 

 

 

10,229 

 

 

15,227 

 

 

7,634 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(851)

 

$

823 

 

$

(16,898)

 

$

(32,367)

Foreign currency translation adjustment

 

29 

 

 

(192)

 

 

215 

 

 

(424)

Total comprehensive (loss) income

$

(822)

 

$

631 

 

$

(16,683)

 

$

(32,791)

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

Dialogic Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

$

(16,898)

 

$

(32,367)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

6,891 

 

 

9,205 

 

Stock-based compensation

 

1,766 

 

 

1,896 

 

Amortization of debt issuance costs and debt discount

 

1,196 

 

 

677 

 

Fair value adjustment to warrants

 

(1,391)

 

 

(2,154)

 

Loss on disposal of fixed assets

 

13 

 

 

364 

 

Payment-in-kind interest expense on long-term debt

 

5,622 

 

 

5,944 

 

Bad debt expense, net

 

1,643 

 

 

334 

 

Gain on settlement of office lease obligation

 

(4,184)

 

 

 —

 

Deferred income taxes

 

94 

 

 

(48)

 

Other non-cash charges

 

215 

 

 

(108)

 

Net changes in operating assets and liabilities

 

 

 

 

 

 

Accounts receivable

 

8,475 

 

 

5,964 

 

Inventory

 

2,399 

 

 

10,033 

 

Other current assets

 

2,136 

 

 

1,715 

 

Accounts payable and accrued liabilities

 

(11,529)

 

 

(8,432)

 

Deferred revenue

 

1,247 

 

 

(1,617)

 

Income taxes payable

 

(251)

 

 

(693)

 

Other long-term liabilities

 

(1,682)

 

 

1,396 

 

Net cash used in operating activities

 

(4,238)

 

 

(7,891)

 

Cash flows from investing activities:

 

 

 

 

 

 

Restricted cash

 

(280)

 

 

497 

 

Purchases of property and equipment

 

(826)

 

 

(967)

 

Purchases of intangible assets

 

 —

 

 

(73)

 

Net cash used in investing activities

 

(1,106)

 

 

(543)

 

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt issuance costs

 

 —

 

 

(1,511)

 

Borrowings (payments) on bank indebtedness, net

 

154 

 

 

(1,800)

 

Proceeds from long-term debt, net of original issue discount

 

3,200 

 

 

4,000 

 

Net cash provided by financing activities

 

3,354 

 

 

689 

 

Effect of exchange rate changes on cash and cash equivalents

 

 —

 

 

53 

 

Net decrease in cash and cash equivalents

 

(1,990)

 

 

(7,692)

 

Cash and cash equivalents at beginning of period

 

6,501 

 

 

10,353 

 

Cash and cash equivalents at end of period

$

4,511 

 

$

2,661 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid

 

 

 

 

 

 

Interest

$

522 

 

$

5,293 

 

Income taxes

$

449 

 

$

548 

 

Non-cash financing activities:

 

 

 

 

 

 

Issuance of common stock in connection with debt modification

$

3,461 

 

$

 —

 

Debt issuance costs incurred as additional term loan debt

$

250 

 

$

 —

 

Prepayment premium on term loan conversion paid in convertible notes

$

 —

 

$

1,500 

 

Issuance of warrants in connection with debt refinancing

$

 —

 

$

7,072 

 

Conversion of long-term debt

$

 —

 

$

33,034 

 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

5

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

Note 1 – The Company

   Dialogic Inc., the Network Fuel® company (“Dialogic” or the “Company”), inspires the world’s leading service providers and application developers to elevate the performance of media-rich communications across the most advanced networks. The Company increases the reliability of any-to-any network connections, enhances the impact of applications and amplifies the capacity of congested networks. 

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

   The Company sells its products to both enterprise and service provider customers and sells both directly and indirectly through distribution partners such as Technology Equipment Manufacturers,  Value Added Resellers and other channel partners. Its customers enhance their enterprise communications solutions, their networks, or their value-added services with the Company’s products.

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

 

Note 2 – Basis of Presentation

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

   The accompanying condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. 

   The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2012 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the annual financial statements and include adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of September 30, 2013, results of operations for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012. Certain reclassifications have been made to prior periods to conform to the current period presentation.

 

Note 3 – Immaterial Corrections to Prior Period Financial Statements

   Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2012, the Company became aware of one revenue transaction with a distributor recorded during the second quarter of 2012 that should have been recorded on the sell-through basis in the third quarter of 2012 as a result of a non-standard term that was agreed to with the customer by the Company. The Company reviewed shipping dates and terms related to additional shipments of its products during 2012 and the first quarter of 2013 to determine whether revenue was recognized in the correct period. Based on the Company’s evaluation, it was not proper for the Company to recognize revenue for products collected by certain intermediate common carriers, used primarily at quarter-ends, since title and risk of loss did not pass until such shipments were picked up by the customer’s shipping agent under the agreed upon shipping terms. As a result, previously reported product revenue and cost of product revenue for each of the quarterly periods of 2012 were misstated.  In addition, the opening accumulated deficit as of January 1, 2012 was understated and the ending accumulated deficit as of December 31, 2012 was understated.

   The Company assessed the materiality of these errors, using relevant quantitative and qualitative factors, and determined that these errors, both individually and in the aggregate, were not material to any previously reported period. The Company made these immaterial corrections to the 2012 financial statements, which include corrections to each of the quarterly periods of 2012.

6

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

Accordingly, the December 31, 2012 consolidated balance sheet as presented in this Form 10-Q has been revised from the information presented in the Company’s most recent Annual Report on Form 10-K as follows: accounts receivable has been reduced by $1.8 million,  inventory has been increased by $0.6 million and ending accumulated deficit has been increased by $1.2 million. The opening accumulated deficit as of January 1, 2012 was also increased by $1.4 million. The impact of the errors as of and for the year ended December 31, 2012 and for each of the quarters of 2012 is shown in the tables below. There was no impact on cash flows from operating activities in any of the periods presented. The revised financial data will be reflected when those periods are published again in the Company’s future filings with the SEC, as appropriate.

   The following table summarizes the impact of immaterial errors on the Company’s consolidated balance sheet as of December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

 

Immaterial Corrections

 

 

As Revised

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

    Accounts receivable

$

34,248 

 

$

(1,826)

 

$

32,422 

    Inventory

$

8,306 

 

$

568 

 

$

8,874 

         Total current assets

$

58,948 

 

$

(1,258)

 

$

57,690 

         Total assets

$

123,385 

 

$

(1,258)

 

$

122,127 

 

 

 

 

 

 

 

 

 

Liabilities Stockholders' Deficit:

 

 

 

 

 

 

 

 

    Accumulated deficit

$

(253,093)

 

$

(1,258)

 

$

(254,351)

         Total stockholders' deficit

$

(17,844)

 

$

(1,258)

 

$

(19,102)

         Total liabilities and stockholders' deficit

$

123,385 

 

$

(1,258)

 

$

122,127 

 

 

 

 

 

 

 

 

 

 

  

7

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

   The following table summarizes the impact of immaterial corrections on the Company’s consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2012 and for each of the quarters of 2012.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

Q1 2012

 

 

Q2 2012

 

 

Q3 2012

 

 

Q4 2012

 

 

YTD 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Products

$

31,510 

 

$

28,599 

 

$

32,140 

 

$

28,980 

 

$

121,229 

         Total revenue

 

41,107 

 

 

38,559 

 

 

42,391 

 

 

37,912 

 

 

159,969 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

    Products

 

11,067 

 

 

15,901 

 

 

11,070 

 

 

10,483 

 

 

48,521 

         Total cost of revenue

 

16,238 

 

 

20,879 

 

 

16,188 

 

 

14,928 

 

 

68,233 

         Gross profit

 

24,869 

 

 

17,680 

 

 

26,203 

 

 

22,984 

 

 

91,736 

         Loss from operations

 

(7,207)

 

 

(17,805)

 

 

(156)

 

 

(5,547)

 

 

(30,715)

         Loss before provision (benefit) for income taxes

 

(14,425)

 

 

(18,143)

 

 

(234)

 

 

(4,755)

 

 

(37,557)

         Net loss

$

(14,785)

 

$

(18,031)

 

$

(290)

 

$

(4,664)

 

$

(37,770)

Net loss per share - basic and diluted

$

(2.35)

 

$

(2.85)

 

$

(0.03)

 

$

(0.32)

 

$

(4.04)

         Total comprehensive income (loss)

$

(14,834)

 

$

(18,214)

 

$

(482)

 

$

(4,457)

 

$

(37,987)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Immaterial Corrections

 

Q1 2012

 

 

Q2 2012

 

 

Q3 2012

 

 

Q4 2012

 

 

YTD 2012

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Products

$

978 

 

$

(1,645)

 

$

1,697 

 

$

(920)

 

$

110 

         Total revenue

 

978 

 

 

(1,645)

 

 

1,697 

 

 

(920)

 

 

110 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Products

 

(344)

 

 

637 

 

 

(584)

 

 

333 

 

 

42 

         Total cost of revenue

 

(344)

 

 

637 

 

 

(584)

 

 

333 

 

 

42 

         Gross profit

 

634 

 

 

(1,008)

 

 

1,113 

 

 

(587)

 

 

152 

         Loss from operations

 

634 

 

 

(1,008)

 

 

1,113 

 

 

(587)

 

 

152 

         Loss before provision (benefit) for income taxes

 

634 

 

 

(1,008)

 

 

1,113 

 

 

(587)

 

 

152 

         Net loss

$

634 

 

$

(1,008)

 

$

1,113 

 

$

(587)

 

$

152 

Net loss per share - basic and diluted

$

0.10 

 

$

(0.16)

 

$

0.11 

 

$

(0.04)

 

$

0.02 

         Total comprehensive income (loss)

$

634 

 

$

(1,008)

 

$

1,113 

 

$

(587)

 

$

152 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Revised

 

Q1 2012

 

 

Q2 2012

 

 

Q3 2012

 

 

Q4 2012

 

 

YTD 2012

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Products

$

32,488 

 

$

26,954 

 

$

33,837 

 

$

28,060 

 

$

121,339 

         Total revenue

 

42,085 

 

 

36,914 

 

 

44,088 

 

 

36,992 

 

 

160,079 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Products

 

11,411 

 

 

15,264 

 

 

11,654 

 

 

10,150 

 

 

48,479 

         Total cost of revenue

 

16,582 

 

 

20,242 

 

 

16,772 

 

 

14,595 

 

 

68,191 

         Gross profit

 

25,503 

 

 

16,672 

 

 

27,316 

 

 

22,397 

 

 

91,888 

         Loss from operations

 

(6,573)

 

 

(18,813)

 

 

957 

 

 

(6,134)

 

 

(30,563)

         Loss before provision (benefit) for income taxes

 

(13,791)

 

 

(19,151)

 

 

879 

 

 

(5,342)

 

 

(37,405)

         Net loss

$

(14,151)

 

$

(19,039)

 

$

823 

 

$

(5,251)

 

$

(37,618)

Net loss per share - basic and diluted

$

(2.25)

 

$

(3.00)

 

$

0.08 

 

$

(0.36)

 

$

(4.03)

         Total comprehensive income (loss)

$

(14,200)

 

$

(19,222)

 

$

631 

 

$

(5,044)

 

$

(37,835)

 

8

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

 

Note 4 – Summary of Significant Accounting Policies

   There have been no significant changes in the Company’s accounting policies for the three and nine months ended September 30, 2013 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2012. 

Risks and Uncertainties

   The Company has experienced significant losses in the past and has not sustained quarter over quarter profits. The Company is also highly leveraged, with $12.5 million in current bank indebtedness and $73.1 million in long-term debt, net of discount as of September 30, 2013. During 2012, the Company and certain of its subsidiaries entered into and subsequently amended the Third Amended and Restated Credit Agreement, dated as of March 22, 2012, (the “Term Loan Agreement”) with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders (collectively the “Term Lenders”), which among other things, reduced the stated interest rate to 10% from 15%, revised the financial covenants and provided for additional borrowings.

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

   These actions were determined to be a troubled debt restructuring and were taken to improve the Company’s liquidity, leverage and future operating cash flow. The Company also took certain restructuring actions during the year ended December 31, 2012 and the nine months ended September 30, 2013 (see Note 8 for further discussion) in order to improve its future operating performance.

   As discussed further in Notes 6 and 7, the Company is required to meet certain financial covenants under the Term Loan Agreement and Revolving Credit Agreement dated March 5, 2008 (“Revolving Credit Agreement”) between the Company and Wells Fargo Foothill Canada ULC (the “Revolving Credit Lender”), including minimum EBITDA (defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP). Under the Term Loan Agreement, the Company must maintain a minimum EBITDA of at least $1.0 million for the three month period ending on March 31, 2014; $2.0 million for the six month period ending on June 30, 2014; $3.0 million for the nine month period ending on September 30, 2014; and $4.0 million for the twelve month period ending on December 31, 2014 and the last date of each twelve month period ending on December 31thereafter. Under the Revolving Credit Agreement, the Company must maintain a minimum EBITDA of at least $6.0 million for the twelve month period ending on March 31, 2014 and for each twelve month period ending on the last date of each quarter thereafter. In the event that the Company is unable to achieve the aforementioned EBTDA levels, the covenants may not be met and the Company would be required to reclassify its long-term debt under the Term Loan Agreement to current liabilities on its consolidated balance sheet.

   If future covenant or other defaults occur under the Term Loan Agreement or under the Revolving Credit Agreement, the Company does not anticipate having sufficient cash and cash equivalents to repay the debt under these agreements should it be accelerated and would be forced to restructure these agreements and/or seek alternative sources of financing. There can be no assurances that restructuring of the debt or alternative financing will be available on acceptable terms or at all. In the event of an acceleration of the Company’s obligations under the Revolving Credit Agreement or Term Loan Agreement and the Company’s failure to pay the amounts that would then become due, the Revolving Credit Lender and Term Lenders could seek to foreclose on the Company’s assets, as a result of which the Company would likely need to seek protection under the provisions of the U.S. Bankruptcy Code and/or its affiliates might be required to seek protection under the provisions of applicable bankruptcy codes. In that event, the Company could seek to reorganize its business or the Company or a trustee appointed by the court could be required to liquidate its assets. In either of these events, whether the stockholders receive any value for their shares is highly uncertain. If the Company needed to liquidate its assets, the Company might realize significantly less from them than the value that could be obtained in a transaction outside of a bankruptcy proceeding. The funds resulting from the liquidation of its assets would be used first to pay off the debt owed to secured creditors, including the Term Lenders and the Revolving Credit Lender, followed by any unsecured creditors, before any funds would be available to pay its stockholders. If the Company is required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

9

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

   In order for the Company to meet the debt repayment requirements under the Term Loan Agreement and the Revolving Credit Agreement, the Company will need to raise additional capital by refinancing its debt, raising equity capital or selling assets. Uncertainty in future credit markets may negatively impact the Company’s ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include different financial covenants, restrictions and financial ratios other than what the Company currently operates under. Any equity financing transaction could result in additional dilution to the Company’s existing stockholders.

   Based on the Company’s current plans and business conditions, it believes that its existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy its anticipated cash requirements through the end of 2013. Accordingly, the accompanying consolidated financial statements have been prepared on a going concern basis.

Use of Estimates

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

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

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

Fair Value Measurements

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

 

 

 

 

 

 

 

Level 1:

 

Unadjusted quoted prices in active markets for identical assets or liabilities

 

 

Level 2:

 

Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the assets or liabilities

 

 

Level 3:

 

Unobservable inputs for the asset or liability

 

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

 

10

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. The following table sets forth the Company’s financial liabilities that were measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

594 

 

$

 —

 

$

594 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

$

1,985 

 

$

 —

 

$

1,985 

 

$

 —

 

The Company measured its warrants at fair value on a recurring basis and has determined that these financial liabilities should be classified as level 2 instruments in the fair value hierarchy. The following table sets forth the Company’s warrant liability that was measured at fair value as of September 30, 2013 and December 31, 2012 using the Black-Scholes method of valuation using the following assumptions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

December 31,

 

 

 

2013

 

 

 

2012

 

Expected Term

 

3.5 years

 

 

 

4.25 years

 

Volatility

 

89 

%

 

 

90 

%

Dividend Yield

 

 —

%

 

 

 —

%

Risk-Free Interest Rate

 

1.39 

%

 

 

0.72 

%

 

Concentrations and Credit Risk

   As of September 30, 2013 and December 31, 2012, accounts receivable aggregating approximately $21.0 million and $16.8 million were insured for credit risk, which are amounts that represent total insured accounts receivable less an average co-insurance amount of 10%, subject to the terms of the insurance agreement. Under the terms of the insurance agreement, the Company is required to pay a premium equal to 0.13% of consolidated revenue.

   No customers accounted for over 10% of the Company’s revenue for the three and nine months ended September 30, 2013 and 2012, respectively. No customer accounted for more than 10% of accounts receivable as of September 30, 2013 and December 31, 2012. 

  

 

11

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

Note 5Select Balance Sheet Information

Inventory

   Inventory is stated at the lower of cost, determined on a first in, first out basis, or market, and consists primarily of raw material and components; work in process and finished products. The following table sets forth the components of inventory as of September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

December 31, 2012

Raw materials and components

 

$

2,707 

 

$

3,580 

Work in process

 

 

517 

 

 

1,031 

Finished products

 

 

3,172 

 

 

4,263 

Total inventory

 

$

6,396 

 

$

8,874 

 

Property and Equipment

   Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives. The following table sets forth the components of property and equipment, net as of September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

December 31, 2012

 

 

 

 

 

 

 

Computer equipment and software

 

$

40,583 

 

$

40,025 

Furniture and fixtures

 

 

3,359 

 

 

3,355 

Machinery and equipment

 

 

13,208 

 

 

13,077 

Leasehold improvements

 

 

4,655 

 

 

4,278 

 

 

 

61,805 

 

 

60,735 

Less: accumulated depreciation

 

 

(57,218)

 

 

(54,757)

Total property and equipment, net

 

$

4,587 

 

$

5,978 

 

    Depreciation expense was $0.8 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively and $2.5 million for the nine months ended September 30, 2013 and 2012. 

Goodwill and Intangible Assets

   As of September 30, 2013 and December 31, 2012, goodwill was $31.2 million. Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. The Company is required to perform a test for impairment of goodwill and indefinite-lived intangible assets on an annual basis or more frequently if impairment indicators arise during the year.

   As of June 30, 2013, the Company performed an interim impairment test based on triggering events resulting from the significant decrease in the price of its common stock and delisting from the NASDAQ Stock Market during the three months ended June 30, 2013. Based on the results of the interim impairment test, the estimated fair value of the reporting unit exceeded its carrying value by approximately 10% and therefore no impairment was required as of June 30, 2013. During the three months ended September 30, 2013, there were no new triggering events other than those that existed as of June 30, 2013. The Company will assess the estimated fair value of the reporting unit during the fourth quarter as part of its annual test for impairment of goodwill and indefinite-lived intangible assets.

12

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

   The following sets forth a summary of intangible assets as of September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

Indefinite-lived intangibles:

 

 

 

 

 

 

 

 

 

Trade names

 

$

10,000 

 

$

 —

 

$

10,000 

Finite-lived intangibles:

 

 

 

 

 

 

 

 

 

Technology

 

 

55,949 

 

 

(49,058)

 

 

6,891 

Customer relationships

 

 

38,312 

 

 

(34,612)

 

 

3,700 

Software licenses

 

 

3,489 

 

 

(3,489)

 

 

 —

Patents

 

 

1,317 

 

 

(1,252)

 

 

65 

 

 

$

109,067 

 

$

(88,411)

 

$

20,656 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

Indefinite-lived intangibles:

 

 

 

 

 

 

 

 

 

Trade names

 

$

10,000 

 

$

 —

 

$

10,000 

Finite-lived intangibles:

 

 

 

 

 

 

 

 

 

Technology

 

 

55,949 

 

 

(45,792)

 

 

10,157 

Customer relationships

 

 

38,312 

 

 

(33,525)

 

 

4,787 

Software licenses

 

 

3,489 

 

 

(3,486)

 

 

Patents

 

 

1,317 

 

 

(1,175)

 

 

142 

 

 

$

109,067 

 

$

(83,978)

 

$

25,089 

   Amortization expense was $1.5 million and $1.6 million for the three months ended September 30, 2013 and 2012, respectively and $4.4 million and $6.7 million for the nine months ended September 30, 2013 and 2012, respectively.

13

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

Accrued Liabilities

   The following table summarizes the Company’s accrued liabilities as of September 30, 2013 and December 31, 2012.

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

Accrued compensation and benefits

 

$

5,507 

 

$

7,744 

Accrued restructuring expenses

 

 

251 

 

 

3,773 

Accrued royalty expenses

 

 

1,283 

 

 

1,280 

Accrued commissions

 

 

611 

 

 

1,585 

Accrued professional fees

 

 

2,008 

 

 

2,147 

Deferred rent

 

 

25 

 

 

271 

Other accrued expenses

 

 

3,667 

 

 

4,470 

Total accrued liabilities

 

$

13,352 

 

$

21,270 

 

 

 

 

 

 

 

 

 

 

 

   On July 8, 2013, the Company’s subsidiary Dialogic (US) Inc. entered into a Settlement Agreement and Mutual Release (“Settlement Agreement”) with Intel Americas, Inc. (“Intel”) , whereby it agreed to pay $1.0 million, in equal installments over a ten month period, commencing within three working days of the executed agreement, in order to settle the dispute described in the Company’s Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2013 and its other filings with the SEC. As a result, the Company recorded a benefit of $1.8 million during the three months ended September 30, 2013 related to the Settlement Agreement.

    In addition, on July 8, 2013, Dialogic (US) Inc. and Intel entered into a Second Amendment to Sublease Agreement, dated September 19, 2006, with respect to the property located in Parsippany, New Jersey whereby the Company agreed to pay base rent, utilities and taxes of approximately $0.2 million per month, beginning from July 1, 2013 through December 31, 2015 (the end of the lease term). As a result, the Company reversed its deferred rent accrual in the amount of $0.7 million during the three months ended September 30, 2013.

   In the event Dialogic (US) Inc. does not pay rent pursuant to this sublease at any time, it has 60 days to leave the space, with no future liabilities or penalties. As a result, the Company reversed its restructuring accrual in the amount of $2.3 million during the three months ended September 30, 2013. In the event Dialogic (US) Inc. stops payment and does not vacate the space within 60 days, Dialogic (US) Inc. will have to pay the balance of the remaining rent owed under the sublease, plus a penalty of $1.4 million. 

 

 

 

 

 

 

 

 

 

 

 

Note 6 Bank Indebtedness

   The Company has a working capital facility, the Revolving Credit Agreement with the Revolving Credit Lender. As of September 30, 2013, the borrowing base under the Revolving Credit Agreement amounted to $13.7 million, the Company borrowed $12.5 million, and the unused line of credit totaled $12.5 million, of which $1.2 million was available for additional borrowings. As of December 31, 2012, the borrowing base under the Revolving Credit Agreement amounted to $18.1 million, the Company had borrowed $11.7 million, and the unused line of credit totaled $13.3 million, of which $6.4 million was available for additional borrowings.

On February 7, 2013, the Company and certain of its subsidiaries entered into a Twentieth Amendment to the Revolving Credit Agreement (the “Twentieth Amendment”) with the Revolving Credit Lender. Pursuant to the Twentieth Amendment, the Revolving Credit Agreement was amended to change the minimum EBITDA financial covenant and postpone its application until the first quarter ending March 31, 2014. Previously, the minimum EBITDA financial covenant would have commenced in the quarter ending June 30, 2013. The “Availability Block” was increased to $0.5 million and will increase by an additional $0.1 million on July 1, 2013 and on the first day of each fiscal quarter thereafter. The Revolving Credit Agreement was also amended to reduce the Borrowing Base by the Availability Block at all times.

14

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

The following describes certain terms of the Revolving Credit Agreement, as amended:

 

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

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

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

For the three months ended September 30, 2013 and 2012, the Company recorded interest expense related to the Revolving Credit Agreement in the amount of $0.1 million. The average interest rate for the three months ended September 30, 2013 and 2012 was 4.75%. For the nine months ended September 30, 2013 and 2012, the Company recorded interest expense related to the Revolving Credit Agreement in the amount of $0.4 million and $0.5 million, respectively.  The average interest rates for the nine months ended September 30, 2013 and 2012 were 4.75% and 5.05%, respectively. 

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

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

Minimum EBITDA. Defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP. The Company must also maintain Minimum EBITDA of at least $6.0 million for the twelve month period ending on March 31, 2014 and for each twelve month period ending on the last date of each quarter thereafter.

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

 

Note 7 – Debt and Related Party Transactions 

Tennenbaum Capital Partners, LLC (“Tennenbaum”), a private equity firm, manages the funds of the Term Lenders. Tennenbaum also owned approximately 55% of the Company’s outstanding common stock as of September 30, 2013. One Managing Partner for Tennenbaum also serves as a member of the Company’s Board of Directors.

In connection with entering into the Term Loan Agreement during 2012, the Company issued to the Term Lenders warrants to purchase 3.6 million shares of common stock with an exercise price of $5.00 per share.  The fair value of the warrants at issuance of $7.1 million reduced the carrying amount of the Term Loan as a debt discount and is accreted to interest expense over the life of the Term Loan. The warrants have been determined to qualify as a liability and, therefore, have been classified as such in the accompanying unaudited condensed consolidated balance sheets. The fair value of the warrants is determined at the end of each reporting period and the change in fair value is recorded as a change in fair value of warrants in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). The fair value of the warrants was $0.6 million and $2.0 million as of September 30, 2013 and December 31, 2012, respectively. The Company recorded a gain of $0.1 million and $1.8 million for the three months ended September 30, 2013 and 2012, respectively, and a gain of $1.4 million and $2.2 million for the nine months ended September 30, 2013 and 2012, respectively, to reflect the change in fair value, which is recorded as a component of other income (expense), net in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

15

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

On February 7, 2013, the Company and certain of its subsidiaries entered into a Third Amendment to the Term Loan Agreement. Pursuant to the Third Amendment, the Term Lenders agreed to provide for additional borrowing of $4.0 million under the Term Loan Agreement. In consideration of this additional borrowing, the Company issued an amount of common stock to the Term Lenders equal to the market value of 10.0% of the outstanding shares of the common stock of the Company based on the closing price of the Company’s common stock immediately prior to such issuance pursuant to a Subscription Agreement, further described elsewhere in this Form 10-Q. Further, the minimum EBITDA financial covenant was amended and its application was postponed until the fiscal quarter ending March 31, 2014 and the other financial covenants, including the minimum liquidity covenant, are no longer applicable under the Term Loan Agreement. Additionally, the definition of Maturity Date in the Term Loan Agreement was also amended to provide that it shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control (as defined in the Term Loan Agreement).

A closing fee in the amount of $0.3 million was added to principal amount of Term Loans in consideration for the third quarter 2012 cash interest of $0.8 million converted into paid in kind (“PIK”) and $0.5 million of loans funded by the Term Lenders on December 28, 2012.

In connection with the Third Amendment, on February 7, 2013, a total of 1,442,172 shares of common stock were issued to the Term Lenders under the terms of the Subscription Agreement.

The Company and the Term Lenders also entered into a Registration Rights Agreement with the Term Lenders dated February 7, 2013 (the “Rights Agreement”) pursuant to which the Company agreed to file one or more registration statements registering for resale the shares of common stock issued under the Subscription Agreement within 90 days of such issuance. The Company obtained a waiver from the Term Lenders until it regains its eligibility to file a registration statement on Form S-3.

The following describes certain provisions of the Term Loan Agreement, as amended:

   Additional Borrowings. The Term Lenders have at their discretion the ability to provide additional loans to the Company up to $10.0 million on the same terms as the Term Loans. As of December 31, 2012, the Company had received $4.5 million under this provision. On February 7, 2013, in connection with the Third Amendment, the Term Lenders provided for an additional borrowing in the amount of $4.0 million, which was added to the principal amount of Term Loans. Of the total $4.0 million borrowing, approximately $3.2 million was received in cash, after an original issue discount of $0.8 million. There is $1.5 million remaining to be borrowed at the discretion of the Term Lenders.

   Maturity. The Term Loans are due on March 31, 2015, provided that such date shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control.

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

The Company is required to offer to prepay the Term Loans out of the net proceeds of certain asset sales (including asset sales by the Company and its subsidiaries) at 100% of the principal amount of Term Loans prepaid, plus the prepayment premiums described above, subject to the Company’s right to retain proceeds of up to $1.0 million in the aggregate each fiscal year. Subject to the right to retain proceeds of up to $1.5 million in the aggregate in each fiscal year, the Company is also required to prepay the Term Loans out of 50% of the net proceeds from certain equity issuances by the Company, plus the prepayment premiums described above, except that no prepayment premium is required to be paid in respect of the first $35.0 million of net proceeds of an issuance by the Company of stock at a price of $6.25 per share or more.

Interest Rates. The Term Loans bear interest, payable quarterly in cash, at a rate per annum of 10%. In 2012 and thereafter, if certain minimum cash requirements are not met, interest may be paid at the rate of 5% in cash with the remaining 5% added to principal and PIK. However, for interest incurred during the three and nine months ended September 30, 2013, the Company was permitted, based on an agreement with the Term Lender, to pay the cash interest due as PIK.

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

For the three months ended September 30, 2013 and 2012, the Company recorded interest expense of $2.4 million and $1.5 million, respectively, related to the Term Loan Agreement of which $2.4 million and $1.4 million, respectively, related to accrued PIK interest and amortization charges for deferred debt issuance costs and accretion of debt discount, respectively. For the nine months ended September 30, 2013 and 2012, the Company recorded interest expense of $6.8 million and $7.5 million, respectively, related to the Term Loan Agreement of which $6.8 million and $3.5 million, respectively, related to accrued PIK interest and amortization charges for deferred debt issuance costs and accretion of debt discount.

16

 


 

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

 

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

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

Financial Covenants. The Term Loans subject the Company to a Minimum EBITDA, defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP. The Company must maintain a Minimum EBITDA of at least $1.0 million for the three month period ending on March 31, 2014; $2.0 million for the six month period ending on June 30, 2014; $3.0 million for the nine month period ending on September 30, 2014; and $4.0 million for the twelve month period ending on December 31, 2014 and the last date of each twelve month period thereafter. Financial covenants pertaining to Minimum Interest Coverage Ratio, Maximum Consolidated Total Leverage Ratio and Minimum Liquidity have been removed from the Term Loan Agreement, effective with the Third Amendment.

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

The following table summarizes debt with related parties as of September 30, 2013 and December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2013

 

 

2012

Term loan, principal

 

$

78,536 

 

$

68,665 

Debt discount

 

 

(5,462)

 

 

(2,129)

Total long-term

 

$

73,074 

 

$

66,536 

 

 

 

Note 8 – Restructuring Charges

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

In December 2012, the Company committed to and approved a restructuring plan for a workforce reduction of approximately 95 full-time employees. On January 9, 2013, the Company executed upon the restructuring plan and notified the affected employees. The termination benefits are comprised of severance and related ongoing employee benefits. The Company had undertaken such workforce reduction in order to reduce operating costs and focus its resources on a restructured business model. During the three and nine months ended September 30, 2013, cash payments amount to $0.1 million and $2.6 million, respectively, for these termination benefits. For the three and nine months ended September 30, 2013, the Company recorded a charge in the amount of $0.02 million and $0.1 million, respectively, for termination benefits. As of September 30, 2013 and December 31, 2012, zero and $2.5 million, respectively, remained accrued and unpaid for these termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

For the three and nine months ended September 30, 2012, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.2 million and $3.6 million. Such charges were recorded as a component of restructuring charges in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

   In a