TRANSWITCH CORP /DE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis in conjunction with our unaudited interim condensed consolidated financial statements and the related notes thereto contained in Part 1, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2011 and Quarterly Reports on Form 10-Q filed subsequently thereto.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains, and any documents incorporated herein by reference may contain, forward-looking statements that involve risks and uncertainties. When used in this document, the words, "intend", "anticipate", "believe", "estimate", "plan", "expect" and similar expressions as they relate to us are included to identify forward-looking statements. Our actual results could differ materially from the results discussed in the forward-looking statements as a result of risk factors including those set forth in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011 and our other Quarterly Reports on Form 10-Q filed subsequently thereto.

COMPANY OVERVIEW We provide innovative integrated circuit (IC) and intellectual property (IP) solutions that deliver core functionality for video, voice, and data communications equipment for the customer premises and network infrastructure markets. For the customer premises market, we offer multi-standard, high-speed interconnect solutions enabling the distribution and presentation of high-definition (HD) video and data content for consumer electronics applications.

High-speed interconnect solutions include HDMI, Displayport and Ethernet IP cores and our recently introduced product family HDplay, which incorporates our proprietary HDP technology. Our HDP technology combines HDMI 1.4 and Displayport 1.1 and supports either standard with a single connector. The applications for this product include projectors, AVR systems and monitors. Our interoperable connectivity solutions are sold to original equipment manufacturers (OEMs) for use in consumer electronics and our licensees have included Samsung, Intel, Texas Instruments, IBM, NEC, TSMC and many others.

For the network infrastructure market, we provide integrated multi-core network processor system-on-a-chip solutions for fixed, 3G and 4G mobile, VoIP and multimedia applications. Network infrastructure processing equipment includes multi-media processing engines to address multiple carrier segments such as wireline and wireless gateways, session border controllers, media resource functions, multi-service access nodes, passive optical network multi-dwelling units and translation gateways. Enterprise applications include VoIP private branch exchanges. Communication network premises equipment includes IP multimedia subsystem and Voice over LTE capable 4G/LTE fixed wireless gateways, residential gateway routers, small office, home office routers and secure VoIP private branch exchanges. We have developed and maintained a broad intellectual property portfolio. We have leveraged our portfolio by licensing our software and, from time to time, selling our patents.

In connection with developments in our industry and our long-term growth strategy, we continually evaluate our portfolio of businesses to ensure that we are investing in those businesses that will contribute to shareholder value over the long term. While we continue to offer our suite of broadband wireline and wireless telecom products, we have strategically refocused our efforts to our interconnect technologies which we believe are differentiated and provide the greatest opportunity of future growth as further described below.

Recent developments: During the quarter, we continued to reduce operating expenses. Our operating expenses, excluding restructuring charges, went from $7.5 million in the second quarter of 2012 to $6.0 million in third quarter of 2012. All product and software development programs related to our telecom product lines were cancelled and we redeployed all of our remaining research and development resources in India and Israel to our interoperable connectivity solutions for consumer electronic and personal computer markets. We also announced our intentions to sell our non-strategic network infrastructure telecom assets.

During the quarter, we announced that we had retained a leading patent broker to sell our telecom patent portfolio. We will continue to offer our telecom products for the foreseeable future but we will not make any future software enhancements for the software embedded in our communications processor and media system-on-a-chip product lines. Our customers will have the opportunity to license the applicable software if they would like to make further enhancements.

To further lower our operating costs, we issued last time buy announcements to a number of our customers of lower volume product lines that have reached their maturity, which afford our customers the opportunity to purchase products to complete their production before our products are discontinued. We also effectuated restructurings in the first and third quarters of 2011 and we continue to assess our cost structure in relationship to our revenue levels, which may necessitate further expense reductions.

16 TranSwitch Corporation is a Delaware corporation incorporated on April 26, 1988.

Our principal executive offices are located at 3 Enterprise Drive, Shelton CT 06484, and our telephone number at that location is (203) 929-8810. Our Internet address is www.transwitch.com. Our common stock trades on the Nasdaq Capital Market under the symbol "TXCC." Available Information Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are made available free of charge through the Investor Relations section of our Internet website (http://www.transwitch.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Material contained on our website is not incorporated by reference in this Quarterly Report on Form 10-Q. Our executive offices are located at Three Enterprise Drive, Shelton, CT 06484.

17 CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Our unaudited interim condensed consolidated financial statements and related disclosures, which are prepared to conform with accounting principles generally accepted in the United States of America (U.S. GAAP), require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the period reported. We are also required to disclose amounts of contingent assets and liabilities at the date of the consolidated financial statements. Our actual results in future periods could differ from those estimates and assumptions. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

During the nine months ended September 30, 2012, there were no significant changes to the critical accounting policies we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2011.

RESULTS OF OPERATIONS The results of operations that follow should be read in conjunction with our critical accounting policies and use of estimates summarized above as well as our accompanying unaudited interim condensed consolidated financial statements and notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. The following table sets forth certain unaudited interim condensed consolidated statements of operations data as a percentage of net revenues for the periods indicated.

Three Months Ended Nine Months Ended September 30 September 30, 2012 2011 2012 2011 Net revenues: Product revenues 34 % 73 % 58 % 67 % Intellectual property and service revenues 66 % 27 % 42 % 33 % Total net revenues 100 % 100 % 100 % 100 % Cost of revenues:Product cost of revenues 15 % 21 % 22 % 21 % Provision for excess and obsolete inventories 3 % - 5 % 1 % Intellectual property and service cost of revenues 18 % 14 % 9 % 13 % Total cost of revenues 36 % 35 % 36 % 35 % Gross profit 64 % 65 % 64 % 65 % Operating expenses: Research and development 70 % 70 % 101 % 62 % Marketing and sales 24 % 27 % 34 % 27 % General and administrative 39 % 29 % 48 % 26 % Restructuring charges, net - 14 % 8 % 6 %Reversal of accrued royalties (7 )% (7 )% (7 )% (9 )% Total operating expenses 126 % 133 % 184 % 112 % Operating loss (62 )% (68 )% (120 )% (47 )% Net Revenues We have two product line categories: Customer Premises Equipment (CPE) and Network Infrastructure. Our CPE product line category includes HDMI, DisplayPort and Ethernet IP Cores which have been incorporated into a number of consumer electronics and PC appliances and Multi-Service Communications Processors used in broadband modems or to be added as part of a small office, home office, or SOHO network. Our CPE product line also includes our recently introduced product family HDplay, which incorporates our proprietary HDP technology. Our HDP technology combines HDMI 1.4 and Displayport 1.1 and supports either standard with a single connector. The applications for this product include projectors, AVR systems and monitors. Our interoperable connectivity solutions are sold to original equipment manufacturers (OEMs) for use in consumer electronics.

18 Our Network Infrastructure product line category includes our Optical Transport, Carrier Ethernet, Media Gateway/VoIP and Broadband Access product lines. The Optical Transport products are incorporated into OEM systems that improve the efficiency of fiber optic networks for packetized data traffic, thereby increasing the overall network capacity. Our Media Gateway/VoIP products provide Voice-over-IP and other packet processing functionality in a variety of equipment types deployed in wireless and wire-line carrier networks as well as in enterprise networks. These equipment types include large capacity media gateways in the core of the network, small-medium capacity access gateways in the 'last-mile' section of the network and customer premise equipment for business and residential subscribers. The Broadband Access product line is incorporated into equipment that provides high speed connections to subscribers using fiber (FTTx) or DSL technology, enabling telecommunications service providers to support next generation voice, data and video services. The Carrier Ethernet product line facilitates the transition of existing networks-based legacy voice oriented technologies to Ethernet technology which is more suitable and efficient for supporting next generation converged video, data and voice services.

Our Network Infrastructure product line and our Multi-Service Communications Processors continue to show a decline year over year. As such, this may affect our goodwill impairment analysis in the future.

The following table summarizes our net revenue mix by product line category: Three Months Ended Three Months Ended (in thousands) September 30, 2012 September 30, 2011 Percent of Percent of Percentage Net Total Net Net Total Net Decrease in Revenues Revenues Revenues Revenues Revenues Network Infrastructure $ 3,462 73 % $ 4,686 70 % (26 )% Customer Premises Equipment 1,290 27 % 1,979 30 % (35 )% Total net revenues $ 4,752 100 % $ 6,665 100 % (29 )% Nine Months Ended Nine Months Ended (in thousands) September 30, 2012 September 30, 2011 Percent of Percent of Percentage Net Total Net Net Total Net Decrease in Revenues Revenues Revenues Revenues Revenues Network Infrastructure $ 9,471 77 % $ 14,230 65 % (33 )% Customer Premises Equipment 2,787 23 % 7,715 35 % (64 )% Total net revenues $ 12,258 100 % $ 21,945 100 % (44 )% Total net revenues for the three months ended September 30, 2012 were $4.8 million as compared to $6.7 million for the three months ended September 30, 2011, a decrease of $1.9 million, or 29%. Our Network Infrastructure revenues decrease of approximately 26% was a result of lower sales of Carrier Ethernet and VoIP products due to reduced telecom infrastructure capital expenditures and the maturation of our product lines. This reduction was partially offset by greater intellectual property licensing fees. Our CPE revenues decrease of approximately 35% was attributable to decreased service revenues for IP licensing of our high speed interface technology.

Total net revenues for the nine months ended September 30, 2012 were $12.3 million as compared to $21.9 million for the nine months ended September 30, 2011, a decrease of $9.7 million, or 44%. Our Network Infrastructure revenues decrease of approximately 33% was a result of lower sales of Carrier Ethernet and VoIP products due to reduced telecom infrastructure capital expenditures and the maturation of our product lines. This reduction was partially offset by greater intellectual property licensing fees. Our CPE revenues decrease of approximately 64% was attributable to decreased service revenues for IP licensing of our high speed interface technology and reduced sales of CPE ASIC products.

International net revenues represented approximately 31% of net revenues for the three months ended September 30, 2012 as compared to 74% for the three months ended September 30, 2011. Also, international net revenues represented approximately 40% of net revenues for the nine months ended September 30, 2012 as compared to 74% for the nine months ended September 30, 2011.

19 Gross Profit Total gross profit for the three months ended September 30, 2012 decreased by approximately $1.2 million or 29% as compared to the three months ended September 30, 2011. The decrease in gross profit was primarily the result of a decrease in total net revenues.The total gross profit as a percentage of revenue was 64% and 65% for three months ended September 30, 2012 and 2011, respectively. Also during the three months ended September 30, 2012 and 2011, we recorded provisions for excess and obsolete inventories in the amounts of approximately $0.2 million and $0.1 million, respectively.

Total gross profit for the nine months ended September 30, 2012 decreased by approximately $6.5 million or 45% as compared to the nine months ended September 30, 2011. The decrease in gross profit was primarily the result of a decrease in total net revenues.The total gross profit as a percentage of revenue was 64% and 65% for nine months ended September 30, 2012 and 2011, respectively. Also during the nine months ended September 30, 2012 and 2011, we recorded provisions for excess and obsolete inventories in the amounts of approximately $0.6 million and $0.2 million, respectively.

We anticipate that gross profit will continue to be impacted by fluctuations in the volume and mix of our product shipments as well as material costs, yield and the fixed cost absorption of our product operations.

Research and Development Research and development expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to electronic design automation tools, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses. During the three months ended September 30, 2012, research and development expenses decreased $1.3 million, or 29% over the comparable period of 2011. During the nine months ended September 30, 2012, research and development expenses decreased 10% over the comparable period of 2011. These decreases were a result of decreased labor and other cost savings as a result of workforce reductions from restructuring plans that were implemented during the first and third quarters of 2011 and second quarter of 2012. The workforce reductions principally affected our Network Infrastructure product line.

All product and software development programs related to our telecom product lines were cancelled and we redeployed all of our remaining research and development resources in India and Israel to our interoperable connectivity solutions for consumer electronic and personal computer markets. We will continue to closely monitor both our costs and our revenue expectations in future periods. We will continue to concentrate our spending on research and development to meet our customer requirements and respond to market conditions.

Marketing and Sales Marketing and sales expenses consist primarily of personnel-related, trade show, travel and facilities expenses. Marketing and sales expenses for the three months ended September 30, 2012 decreased by $0.6 million or 36% as compared to the three months ended September 30, 2011. Marketing and sales expenses for the nine months ended September 30, 2012 decreased by $1.7million or 30% as compared to the nine months ended September 30, 2011. These decreases were a result of decreased salaries as a result of workforce reductions from restructuring plans that were implemented during the first and third quarters of 2011 and second quarter of 2012, along with reduced expense for amortization of intangible assets as a result of lower intangible asset balances due to intangible asset impairment charges that were recorded in the fourth quarter of 2011.

General and Administrative General and administrative expenses consist primarily of personnel-related expenses, professional and legal fees, and insurance and facilities expenses.

General and administrative expenses for the three months ended September 30, 2012 decreased $0.1 million or 4% as compared to the comparable period in 2011.

General and administrative expenses for the nine months ended September 30, 2012 increased by $0.2 million or 4% as compared to the comparable period in 2011. This increase was a result of increased professional and legal fees partially offset by decreased salaries as a result of workforce reductions from restructuring plans that were implemented during second quarter of 2012.

Restructuring Charges, net During the three months ended September 30, 2012 and 2011, we recorded net restructuring charges of zero and $0.9 million, respectively. During the nine months ended September 30, 2012 and 2011, we recorded net restructuring charges of $1.0 million and $1.4 million, respectively. Information on restructuring charges is located in Note 12 (Restructuring Charges) of the Notes to Unaudited Condensed Consolidated Financial Statements.

20 Interest Income (Expense), net Interest expense, net was less than $0.1 million for both the three months ended September 30, 2012 and 2011. Interest expense, net was less than $0.1 million and $0.1 million for the nine months ended September 30, 2012 and 2011, respectively. Interest expense decreased approximately by less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2012, respectively, as compared to the comparable 2011 periods due to the pay off of our Convertible Notes due September 30, 2011 ("2011 Notes"). The 2011 Notes were fully paid as of September 30, 2011 and, as such, there were no interest payments related to the 2011 Notes during the nine months ended September 30, 2012.

Interest income may fluctuate in the future as it is affected by our cash and investment balances and the related interest rates. At September 30, 2012 and 2011, the effective interest rate on our interest-bearing securities was approximately 2.9% and 2.4%, respectively.

Income Tax Expense Income tax expense was approximately $0.1 million and $0.2 million for the three months ended September 30, 2012 and 2011, respectively. Income tax expense was approximately $0.3 million and $0.5 million for the nine months ended September 30, 2012 and 2011, respectively. The amounts that were recorded reflect income taxes on the earnings of certain of our foreign subsidiaries, principally, India.

During the three and nine months ended September 30, 2012 and 2011, we evaluated our deferred income tax assets as to whether it is "more likely than not" that the deferred income tax assets will be realized. In our evaluation of the realizability of deferred income tax assets, we consider projections of future taxable income, the reversal of temporary differences and tax planning strategies. We have evaluated the realizability of the deferred income tax assets, and have determined that it is "more likely than not" that all of the deferred income tax assets will not be realized. Accordingly, a valuation allowance was recorded for all of our domestic net deferred income tax assets.

In future periods, we will not recognize a deferred tax benefit and will maintain a deferred tax valuation allowance until we achieve sustained U.S.

taxable income. Additionally, in the future, we expect our current income tax expense to be related to taxable income generated by our foreign subsidiaries.

21 LIQUIDITY AND CAPITAL RESOURCES We have incurred significant operating losses and have used cash in our operating activities for the past several years. Operating losses have resulted from inadequate sales levels for our cost structure. As of September 30, 2012, we had negative working capital of approximately $4.1 million. In addition, we had outstanding indebtedness to Bridge Bank under our credit facility of $0.9 million.

Our current forecast projects that, absent an infusion of capital, we will be unable to meet our current obligations through September 30, 2013. These conditions raise substantial doubt about our ability to continue as a going concern.

In July of 2012, we announced a restructuring which primarily affected the telecom product unit and is expected to save $8.0 million in annual operating costs. We began to see these cost savings during the third quarter of 2012.

We also effectuated restructurings in the first and third quarters of 2011. We continue to assess our cost structure in relationship to our revenue levels, which may necessitate further expense reductions.

As with any operating plan, there are risks associated with our ability to execute it, including the current economic environment in which we operate.

Therefore, there can be no assurance that we will be able to satisfy our obligations, or achieve the operating improvements as contemplated by the current operating plan. If we are unable to execute this plan, we will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. There can be no assurance that the additional funding sources will be available to us at favorable rates or at all. If we cannot maintain compliance with our covenant requirements on our bank financing facility or cannot obtain appropriate waivers and modifications, the lenders may call the debt. If the debt is called, we would need to obtain new financing and there can be no assurance that we will be able to do so. If we are unable to achieve our operating plan and maintain compliance with our loan covenants and our debt is called, we will not be able to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

As of September 30, 2012 and December 31, 2011, we had total cash, cash equivalents, restricted cash and investment balances of approximately $1.6 million and $7.6 million, respectively. This and our credit facility are our primary sources of liquidity, as we are not currently generating any significant positive cash flow from our operations. A summary of our cash, cash equivalents, restricted cash, investments, credit agreements and future commitments are detailed as follows: Cash, Cash Equivalents, Restricted Cash, Investments, Credit Agreements and Issuances of Common Stock Our primary source of liquidity is cash, cash equivalents, restricted cash, short-term investment balances, a credit facility agreement and issuances of our common stock.

Credit Facility: On March 12, 2010 we entered into a credit facility agreement with Bridge Bank N.A., a subsidiary of Bridge Capital Holdings. The facility allows for borrowings up to the lower of $5.0 million or 80% of our outstanding eligible accounts receivable as determined by Bridge Bank N.A. This agreement was amended and restated on April 4, 2011 and the current facility matures on April 4, 2013.

The agreement bears interest at the higher of (i) the lender's prime rate plus 2.0 percent or (ii) 5.25 percent, plus the payment of certain fees and expenses.

At September 30, 2012, we had $0.9 million in outstanding borrowings under this facility which was the total amount available.

During the third quarter 2012, we were not in compliance with a financial covenant under this credit facility. Bridge Bank has agreed to waive this event of default and our noncompliance with this covenant. We were in compliance with this financial convent as of September 30, 2012 and all subsequent measurement periods.

Common Stock Purchase Agreement with Aspire Capital: On July 16, 2012, we entered into a Common Stock Purchase Agreement (the "Aspire Purchase Agreement") with Aspire Capital Fund, LLC ("Aspire") to purchase up to an aggregate of $11.0 million of shares of our common stock, par value $0.001 per share ("Common Stock") over the two-year term of the Aspire Purchase Agreement. Under the Aspire Purchase Agreement, Aspire made an initial purchase of 990,099 shares for the purchase price of $1,000,000. During the term of the Aspire Purchase Agreement, we can direct Aspire to purchase up to 50,000 shares per business day at a price equal to the lower of (i) the lowest sale price for the Common Stock on the date of sale or (ii) the arithmetic average of the three lowest closing sale prices for the Common Stock during the 12 consecutive business days ending on the business day immediately preceding the date ofsale.

22 In addition, on any business date that we direct Aspire to purchase 50,000 shares, we also have the right to direct Aspire to purchase an amount of Common Stock equal to a percentage (not to exceed 15%, which limitation may be increased to 30% by mutual agreement of the parties) of the aggregate shares of Common Stock traded on the next business day, subject to a maximum number of shares determined by us. Subject to certain limitations, the purchase price for these shares shall be the lower of (i) the closing sale price on the date of sale or (ii) ninety-five percent (95%) of the next business day's volume weighted average price. We have the right to determine a maximum number of shares and set a minimum market price threshold for each purchase.

In connection with the Aspire Purchase Agreement, we also entered into a Registration Rights Agreement (the "Registration Rights Agreement") with Aspire dated July 16, 2012. The Registration Rights Agreement provides, among other things, that we will register the sale of the shares sold to Aspire. In accordance with the Registration Rights Agreement, the sale of the shares to Aspire is being made pursuant to a prospectus supplement dated July 17, 2012 and an accompanying prospectus dated October 21, 2009, under our Registration Statement on Form S-3 (File No. 333-162609), filed with the Securities and Exchange Commission on October 21, 2009, as amended and supplemented from time to time (the "Registration Statement"). We further agreed to keep the Registration Statement effective (and file a new registration statement if necessary) and to indemnify Aspire for certain liabilities in connection with the sale of the shares under the terms of the Registration Rights Agreement.

During the three and nine months ended September 30, 2012, Aspire purchased a total of 2,230,560 shares under the Aspire Purchase Agreement for net proceeds to us of $2.1 million. Our issuance costs were $0.4 million which includes 297,030 shares issued to Aspire as a commitment fee per the Purchase Agreement.

Registered Direct Offering: On May 8, 2012, we entered into a Securities Purchase Agreement dated May 8, 2012 (the "Investor Purchase Agreement") with certain purchasers to sell 1,315,000 shares of Common Stock for gross proceeds of approximately $2,445,900 (the "Investor Offering"). The purchase price for each share of Common Stock in the Investor Offering was $1.86.

On May 8, 2012, we also entered into a Securities Purchase Agreement dated May 8, 2012 (the "Director and Officer Purchase Agreement") with certain of the Company's directors and officers to sell up to 161,150 shares of Common Stock for gross proceeds of approximately $333,580 (the "Director and Officer Offering" and together with the Investor Offering, the "Registered Direct Offering"). The purchase price for each share of Common Stock in the Director and Officer Offering was $2.07.

The shares sold in the Registered Direct Offering were registered pursuant to a prospectus supplement dated May 8, 2012 and an accompanying prospectus dated October 21, 2009, pursuant to the Registration Statement.

The net proceeds to us from the Registered Direct Offering, after deducting our offering expenses, were approximately $2.7 million.

At Market Issuance Sales Agreement with MLV & Co. LLC: On February 10, 2012, we entered into an At Market Issuance Sales Agreement (the "Agreement") with MLV & Co. LLC ("MLV"), pursuant to which we could issue and sell shares of our common stock, $0.001 par value per share, having an aggregate offering price of up to $10,000,000 (the "Shares") from time to time through MLV (the "Offering"). Also on February 10, 2012, we filed a prospectus supplement with the Securities and Exchange Commission in connection with the Offering (the "Prospectus Supplement"). The shares of common stock to be sold under the Agreement were registered pursuant to an effective shelf Registration Statement on Form S-3 (Registration No. 333-162609) and the Prospectus Supplement.

Upon delivery of a placement notice and subject to the terms and conditions of the Agreement, MLV could sell the common stock by methods deemed to be an "at-the-market" offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), including sales made directly on The NASDAQ Capital Market, on any other existing trading market for the common stock or to or through a market maker.

We agreed to pay MLV a commission equal to 3.0% of the gross sales price per share sold and provide indemnification and contribution to MLV against certain civil liabilities, including liabilities under the Securities Act.

23 On July 13, 2012, we delivered to MLV & Co. LLC ("MLV") notice of termination of the Agreement, which termination became effective July 23, 2012.

From July 1, 2012 through the termination of the ATM Agreement on July 23, 2012, we issued and sold 363,343 shares under the ATM Agreement for net proceeds of $0.4 million. No shares were sold under the ATM Agreement in the first six months of 2012.

A summary of the net change in total cash and investments follows: September 30, December 31, September 30, December 31, (in thousands) 2012 2011 Change 2011 2010 Change Cash and cash equivalents $ 1,519 $ 5,453 $ (3,934 ) $ 4,450 $ 6,280 $ (1,830 ) Restricted cash 88 98 (10 ) 138 582 (444 ) Short-term investments - 2,003 (2,003 ) 6,516 973 5,543 Total cash and investments $ 1,607 $ 7,554 $ (5,947 ) $ 11,104 $ 7,835 $ 3,269 Effect of Exchange Rates and Inflation: Exchange rates and inflation have not had a significant impact on our operations or cash flows.

Commitments and Significant Contractual Obligations There have been no material changes to our contractual obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on March 13, 2012. Additional comments related to our contractual obligations are presented below.

We have outstanding operating lease commitments of approximately $13.5 million, payable over the next five years. Some of these commitments are for space that is not being utilized and for which we recorded restructuring charges in prior periods. As of September 30, 2012, we have sublease agreements totaling approximately $10.0 million to rent portions of our excess facilities over the next five years. We currently believe that we can fund these lease commitments in the future; however, there can be no assurances that we will not be required to seek additional capital or provide additional guarantees or collateral on these obligations.

We also have pledged approximately $0.1 million as of September 30, 2012 and December 31, 2011 as collateral for stand-by letters of credit to support customer credit requirements. These amounts were in our bank accounts and are included in our restricted cash balances.

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