10-Q 1 vtss-2013630x10qq3.htm 10-Q VTSS-2013.6.30-10Q Q3

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to                 
 
Commission file number 1-31614
 ______________________________________
 
VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
77-0138960
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
741 Calle Plano
Camarillo, California 93012
(Address of principal executive offices)(zip code)
 
Registrant’s telephone number, including area code: (805) 388-3700
 ______________________________________ 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
 
 
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
As of August 2, 2013, there were outstanding 57,532,654 shares of the registrant’s Common Stock, $0.01 par value. 
 


VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2013

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I. FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS
 
VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS

 
June 30, 2013
 
September 30, 2012
 
(in thousands, except par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash
$
71,335

 
$
23,891

Accounts receivable, net
10,404

 
9,403

Inventory, net
11,881

 
12,060

Prepaid expenses and other current assets
3,193

 
2,125

Total current assets
96,813

 
47,479

Property, plant and equipment, net
2,793

 
3,832

Other intangible assets, net
1,251

 
1,175

Other assets
3,700

 
4,130

 
$
104,557

 
$
56,616

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
8,365

 
$
5,726

Accrued expenses and other current liabilities
13,111

 
12,188

Current portion of debt, net
7,967

 
—

Deferred revenue
2,758

 
871

Total current liabilities
32,201

 
18,785

Other long-term liabilities
410

 
574

Long-term debt, net
8,259

 
15,852

Compound embedded derivative
—

 
2,899

Convertible subordinated debt, net
43,907

 
42,521

Total liabilities
84,777

 
80,631

Commitments and contingencies, See note 10


 


Stockholders’ equity (deficit):
 

 
 

Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at June 30, 2013 and September 30, 2012, respectively
1

 
1

Common stock, $0.01 par value: 250,000 shares authorized; 56,406 and 25,812 shares outstanding at June 30, 2013 and September 30, 2012, respectively
564

 
258

Additional paid-in-capital
1,889,778

 
1,829,976

Accumulated deficit
(1,870,563
)
 
(1,854,250
)
Total stockholders’ equity (deficit)
19,780

 
(24,015
)
 
$
104,557

 
$
56,616

 
 
 
 

 
See accompanying notes to unaudited consolidated financial statements.


3

VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share data)
Net revenues:
 

 
 

 
 
 
 
Product revenues
$
26,285

 
$
25,730

 
$
74,879

 
$
81,867

Intellectual property revenues
133

 
4,557

 
2,019

 
8,148

Net revenues
26,418

 
30,287

 
76,898

 
90,015

Costs and expenses:
 

 
 

 
 

 
 
Cost of product revenues
11,666

 
11,270

 
34,010

 
34,028

Engineering, research and development
11,706

 
10,513

 
31,987

 
32,518

Selling, general and administrative
7,257

 
6,296

 
22,617

 
22,131

Amortization of intangible assets
80

 
88

 
266

 
234

Costs and expenses
30,709

 
28,167

 
88,880

 
88,911

(Loss) income from operations
(4,291
)
 
2,120

 
(11,982
)
 
1,104

Other expense (income):
 

 
 

 
 

 
 
Interest expense, net
1,983

 
1,950

 
5,919

 
5,823

Gain on compound embedded derivative
—

 
(5,755
)
 
(803
)
 
(3,773
)
Other expense (income), net
31

 
(20
)
 
5

 
21

Other expense (income), net
2,014

 
(3,825
)
 
5,121

 
2,071

(Loss) income before income tax expense (benefit)
(6,305
)
 
5,945

 
(17,103
)
 
(967
)
Income tax expense (benefit)
129

 
1,234

 
(790
)
 
1,363

Net (loss) income
$
(6,434
)
 
$
4,711

 
$
(16,313
)
 
$
(2,330
)
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic
$
(0.17
)
 
$
0.18

 
$
(0.47
)
 
$
(0.09
)
Net (loss) income per common share - diluted
$
(0.17
)
 
$
0.16

 
$
(0.47
)
 
$
(0.09
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
38,630

 
25,302

 
34,601

 
24,951

Weighted average common shares outstanding - diluted
38,630

 
38,413

 
34,601

 
24,951

 
See accompanying notes to unaudited consolidated financial statements.


4

VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in-Capital
 
Accumulated Deficit
 
Total
Stockholders’ Equity (Deficit)
(in thousands)
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance at September 30, 2012
135

 
$
1

 
25,812

 
$
258

 
$
1,829,976

 
$
(1,854,250
)
 
$
(24,015
)
Net loss
—

 
—

 
—

 
—

 
—

 
(16,313
)
 
(16,313
)
Compensation expense related to stock options, awards and ESPP
—

 
—

 
—

 
—

 
3,305

 
—

 
3,305

Issuance of common stock upon exercise of stock options
—

 
—

 
1

 
—

 
3

 
—

 
3

Issuance of common stock under ESPP
—

 
—

 
498

 
5

 
858

 
—

 
863

Issuance of common stock, net of offering costs
—

 
—

 
29,371

 
294

 
54,167

 
—

 
54,461

Release of restricted stock units
—

 
—

 
1,042

 
10

 
(10
)
 
—

 
—

Repurchase of restricted stock units for payroll taxes
—

 
—

 
(318
)
 
(3
)
 
(617
)
 
—

 
(620
)
Reclassification of compound embedded derivative liability to additional paid-in-capital
—

 
—

 
—

 
—

 
2,096

 
—

 
2,096

Balance at June 30, 2013
135

 
$
1

 
56,406

 
$
564

 
$
1,889,778

 
$
(1,870,563
)
 
$
19,780

 
See accompanying notes to unaudited consolidated financial statements.


5

VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended June 30,
 
2013
 
2012
 
(in thousands)
Cash flows (used in) provided by operating activities:
 

 
 

Net loss
$
(16,313
)
 
$
(2,330
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization
1,877

 
2,228

Stock-based compensation
3,305

 
3,301

Change in fair value of compound embedded derivative liability
(803
)
 
(3,773
)
Common stock issued for employee stock plans
863

 
868

Gain on disposal of assets
(153
)
 
650

Amortization of debt issuance costs
203

 
204

Amortization of debt discounts
1,890

 
1,751

Accretion of debt premiums
(126
)
 
(117
)
Change in operating assets and liabilities:
 
 
 

Accounts receivable
(1,001
)
 
(1,134
)
Inventory
179

 
6,062

Prepaids and other assets
(841
)
 
441

Accounts payable
2,639

 
36

Accrued expenses and other liabilities
553

 
(1,679
)
Deferred revenue
1,888

 
(1,298
)
Net cash (used in) provided by operating activities
(5,840
)
 
5,210

 
 
 
 
Cash flows used in investing activities:
 

 
 

Capital expenditures
(575
)
 
(536
)
Proceeds from the sale of capital assets
156

 
—

Payments under licensing agreements
(342
)
 
(781
)
Net cash used in investing activities
(761
)
 
(1,317
)
 
 
 
 
Cash flows provided by (used in) financing activities:
 

 
 

Proceeds from the exercise of stock options
3

 
16

Net proceeds from the sale of common stock
54,668

 
—

Repurchase of restricted stock units for payroll taxes
(620
)
 
(633
)
Other
(6
)
 
(8
)
Net cash provided by (used in) financing activities
54,045

 
(625
)
 
 
 
 
Net increase in cash
47,444

 
3,268

Cash at beginning of period
23,891

 
17,318

Cash at end of period
$
71,335

 
$
20,586

 
 
 
 
Supplemental cash flow information:
 

 
 

Cash paid (refunded) during the period for:
 

 
 

Interest
$
4,917

 
$
4,919

Income taxes
(1,094
)
 
1,474

Non-cash financing activities:
 

 
 

Equity offering costs incurred but not paid
$
207

 
$
—

Reclassification of compound embedded derivative liability to additional paid-in-capital
$
2,096

 
—


See accompanying notes to unaudited consolidated financial statements.

6

VITESSE SEMICONDUCTOR CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

NOTE 1-THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us” or “we”) is a leading supplier of high-performance integrated circuits (“ICs”) that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive semiconductor products for these applications.

Vitesse was incorporated in the state of Delaware in 1987. Our headquarters are located at 741 Calle Plano, Camarillo, California, and our phone number is (805) 388-3700. Our stock trades on the NASDAQ Global Market under the ticker symbol VTSS.

Fiscal Year

Our fiscal year is October 1 through September 30.

Basis of Presentation

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2012, included in our Annual Report on Form 10-K filed with the SEC on December 4, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A filed with the SEC on April 16, 2013.

The consolidated financial statements included herein are unaudited. However, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position, the consolidated results of our operations and the consolidated cash flows and the changes in our stockholders’ deficit. The results of operations for the three and nine months ended June 30, 2013 are not necessarily indicative of the results to be expected for future quarters or the full year.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is the United States dollar; however, our foreign subsidiaries transact in local currencies. Consequently, assets and liabilities are translated into United States dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period. Foreign currency transaction and translation gains and losses are included in results of operations.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the unaudited consolidated financial statements. Management regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory valuation reserves, stock-based compensation, purchased intangible asset valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.


7

Revenue Recognition

Product Revenues

In accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we recognize product revenues when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred where the earnings process is incomplete.

A portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return. Our past history with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products allowing for pricing credits or right of returns. Accordingly, product revenues from sales made through these distributors is not recognized until the distributors ship the product to their customers. We also maintain inventory, or hub arrangements with certain customers. Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.

From time-to-time, we may ship goods to our distributors with no pricing credits and/or no or limited right of return. Under these circumstances, at the time of shipment, product prices are fixed or determinable and the amount of future returns and pricing allowances to be granted in the future can be reasonably estimated and are accrued. Accordingly, revenues are recorded net of these estimated amounts.

Intellectual Property Revenues

We derive intellectual property revenues from the sale and licensing of our intellectual property, maintenance and support and royalty revenue following the sale by our licensees of products incorporating the licensed technology. We enter into intellectual property licensing agreements that generally provide licensees the right to incorporate our intellectual property components in their products with terms and conditions that vary by licensee. Our intellectual property licensing agreements may include multiple elements with an intellectual property license bundled with support services. For such multiple element intellectual property licensing arrangements, we follow the guidance in ASC Topic 605-25, Multiple-Element Arrangements, to determine whether there is more than one unit of accounting.

We recognize revenue from the sale of patents when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. All of the requirements are generally fulfilled upon execution of the patent sale arrangement.

License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. The timing of delivery is dependent on, and varies with, the terms of each contract. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the intellectual property. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.

Certain of our agreements may contain support obligations. Under such agreements we provide unspecified bug fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.

We recognize royalty revenue in the period in which the licensee reports shipment of products incorporating our intellectual property components. Royalties are calculated on a per unit basis, as specified in our agreement with the licensee. We may, at our discretion and in accordance with our agreements, engage a third-party to perform royalty audits of our licensees. Any correction of royalties previously reported would occur when the results are resolved.

For multiple-element arrangements, we allocate revenues to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenues to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”); (ii) third-party evidence of selling price (“TPE”); and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when we sell the deliverable separately and revenue is the price actually

8

charged by us for that deliverable. Generally, we are not able to determine TPE because our licensing arrangements differ from that of our peers. We have concluded that no VSOE or TPE exists because it is rare that either we or our competitors sell the deliverables on a stand-alone basis. ESPs reflect our best estimate of what the selling prices of the elements would be if they were sold regularly on a stand-alone basis. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations.

In determining ESPs, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. The facts and circumstances we may consider include, but are not limited to, prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of uses allowed for a given license.

Shipping and Handling Fees and Costs

Amounts billed to customers for shipping and handling is presented in product revenues. Costs incurred for shipping and handling are included in cost of revenues.

Research and Development Costs

Research and development (“R&D”) costs are expensed when incurred. R&D costs include payroll and related costs, materials, services and design tools used in product development, depreciation, and other overhead costs including facilities and computer equipment costs. Manufacturing costs associated with the development of a new fabrication process or a new product, including mask costs, are expensed until such time as these processes or products are proven through final testing and initial acceptance by the customer.

Marketing Costs

All of the costs related to marketing and advertising our products are expensed as incurred or at the time the marketing
takes place.

Stock Based Compensation

ASC Topic 718, Compensation-Stock Compensation, requires that all stock-based payments to employees, including grants of employee stock options and employee stock purchase rights, be recognized in the financial statements based on their respective grant date fair values. The benefits of tax deductions in excess of recognized compensation cost are required to be reported as a financing cash flow, rather than operating cash flow, as required under previous literature. It is also required to calculate the compensation cost of full-value awards such as restricted stock based on the market value of the underlying stock at the date of the grant. We estimate the expected life of a stock award as the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC. We are further required to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We estimate the fair value of each award as of the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-Scholes model meets the accounting guidance requirements, the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

We have elected to recognize compensation expense for all stock-based awards on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.

Other Income, Net 

Other income, net, consists of interest income, foreign exchange gains and losses and other non-operating gains and losses.


9

Income Taxes

We account for income taxes pursuant to the provisions of ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not “more likely than not,” we establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations. ASC Topic 740-10 prescribes a “more likely than not” recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the unaudited consolidated statements of operations as income tax expense.

Net Income (Loss) per Share

Basic and diluted net income and loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period.

For periods in which we report net income, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, shares to be issued under our Employee Stock Purchase Plan (“ESPP”), convertible preferred stock, 2014 Debentures and the Term B Loan. Unexercised stock options, restricted stock units, and unvested shares to be issued under our ESPP, are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

Under the two-class method of determining earnings for each class of stock, we consider the dividend rights and participating rights in undistributed earnings for each class of stock. The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an as-converted basis.


Risks and Uncertainties

Our future results of operations involve a number of risks and uncertainties. Factors that could affect our business or future results and cause actual results to vary materially from historical results include, but are not limited to, the highly cyclical nature of the semiconductor industry; our high fixed costs; declines in average selling prices; decisions by our integrated device manufacturer customers to curtail outsourcing; our substantial indebtedness; our ability to fund liquidity needs; our failure to maintain an effective system of internal controls; product return and liability risks; the absence of significant backlog in our business; our dependence on international operations and sales; proposed changes to United States tax laws; that our management information systems may prove inadequate; our ability to attract and retain qualified employees; difficulties consolidating and evolving our operational capabilities; our dependence on materials and equipment suppliers; our loss of customers; adverse tax consequences; the development of new proprietary technology and the enforcement of intellectual property rights by or against us; the complexity of packaging and test processes in our industry; competition; our need to comply with existing and future environmental regulations; and fire, flood or other calamity affecting us or others with whom we do business.

Our short-term debt is comprised of our Term A loan (“Term A Loan”), of which the total principal amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B loan (“Term B Loan”) and our convertible subordinated debentures due October 2014 (“2014 Debentures”), of which the total principal amount of $55.8 million is due in October 2014. We currently anticipate that cash on hand and cash provided by operating activities will be sufficient to permit us to pay the entire amount of this indebtedness when due in February and October 2014. To fund ongoing operating cash requirements, however, we anticipate we will need to secure additional funding. We have engaged the services of financial advisory firms to assist us in evaluating possible financing transactions to fund working capital. These transactions include, among others that we may consider from time to time, an extension of the maturity date and other modification of our Term A and B Loans, and the refinancing of indebtedness from the proceeds of one or more new credit facilities. We will pursue these and other potential transactions until we provide for the ongoing operating cash requirements of our business. There can be no assurance, however, that our efforts will be successful.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable. Cash consists of demand deposits maintained with several financial institutions, which often exceed Federal

10

Deposit Insurance Corporation (“FDIC”) limits of $250,000. We have never experienced any losses related to these balances; however, our balances are significantly in excess of insured limits.

At June 30, 2013, there were two direct customers that accounted for 37% of accounts receivable. At September 30, 2012, there was one distributor that accounted for 14% of accounts receivable. We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses. We generally do not require collateral security for outstanding amounts.

We currently purchase wafers from a limited number of vendors. Additionally, since we do not maintain manufacturing facilities, we depend upon close relationships with contract manufacturers to assemble our products. We believe there are other vendors who can provide the same quality wafers at competitive prices and other contract manufacturers that can provide comparable services at competitive prices. We anticipate the continued use of a limited number of vendors and contract manufacturers in the near future. We are also dependent upon third parties for our probe testing. Under our fabless business model, our long-term revenue growth is dependent on our ability to obtain sufficient external manufacturing capacity, including wafer production capacity. We believe that in addition to the vendors currently utilized by us, other vendors would be able to provide these services.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts; they do not bear interest. We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. Should all attempts to collect a receivable fail, the receivable is written off against the allowance. Our allowance for doubtful accounts was zero and $0.3 million as of June 30, 2013 and September 30, 2012, respectively.

Inventory

Inventories are stated at lower of cost or market and consist of materials, labor and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method. Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly, testing and internal overhead. We evaluate inventories for excess quantities and obsolescence. Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain. In order to state the inventory at lower of cost or market, we maintain reserves against individual stocking units. Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

Property, Plant and Equipment

Property, plant and equipment are carried at cost less depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets’ remaining estimated useful lives, ranging from three to five years for machinery and equipment, including product tooling; and the shorter of lease terms or estimated useful lives for
leasehold improvements.

We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, Accounting for the Property, Plant, and Equipment. We perform periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives are compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values. All long-lived assets to be disposed of are reported at the lower of carrying amount or fair market value, less expected selling costs.


11

Intangible Assets

Our intangible assets consist primarily of technology licensing agreements with third-parties. We account for intangible assets in accordance with ASC Topic 350, Goodwill and Others. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. The carrying value of an asset or asset group is not recoverable if the amounts of undiscounted future cash flows the assets are expected to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value. When we identify that impairment has occurred, we reduce the carrying value of the asset to its comparable market value (if available and appropriate) or to its estimated fair value based on a discounted cash flow approach. Currently, we do not have goodwill or indefinite-lived intangible assets.

Fair Value

ASC Topic 820, Fair Value Measurements (“ASC 820”), establishes a framework for measuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2: Other inputs observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborate inputs; and

Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities.

As of June 30, 2013, we did not have any recurring fair value measurements.

Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.

Financial Instruments

ASC Topic 825, Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Our financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we could obtain, for similar instruments, in the current market. Our debt instruments are included in current and long-term debt, net, and convertible subordinated debt, net on our unaudited consolidated balance sheets.

Senior Term A Loan

At its inception, the fair value of the Term A Loan was computed using a cash flow analysis in which the periodic cash coupon payments and the principal payment at maturity were discounted to the valuation date using an appropriate market discount rate. The discount rate was determined by analyzing the seniority and securitization of the instrument, our financial condition, and observing the quoted bond yields in the fixed income market as of the valuation date. The valuation was determined using Level 3 inputs.

Senior Term B Loan

At its inception, the fair value of the Term B Loan was computed using a binomial lattice model. The valuation was determined using Level 3 inputs. The valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of our common stock into which the Term B Loan is convertible.


12

Convertible Subordinated Debt

The 2014 Debentures required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. The compound embedded derivative was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock. A final valuation was completed on October 30, 2012. We recorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million, from other long-term liabilities, to equity.

At its inception, the approximate fair value of the compound embedded derivative included in our 2014 Debentures was computed as the difference between the estimated value of the 2014 Debentures with and without the compound embedded derivative features. The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework. These valuations were determined using Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes, and trading information of our common stock into which the 2014 Debentures are convertible. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.

The compound embedded derivative was presented on the balance sheet at fair value and was marked-to-market, until the make-whole payment for foregone interest expired on October 30, 2012. The change in the fair value of the compound embedded derivative was a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. As we intended to, and had the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt, we classified the liability as a long-term liability on our consolidated balance sheets as of September 30, 2012.

The valuation methodologies we use as described above require considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Warranty

We generally warrant our products against defects for one year from date of shipment. A warranty reserve is recorded against revenues when products are shipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenues for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not
been material.

Contingencies

We assess our exposure to loss contingencies, including environmental, legal and income tax matters, and provide an accrual for exposure if it is judged to be probable and reasonably estimable. If the actual loss from a loss contingency differs from management’s estimates, results of operations could be adjusted upward or downward.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), to establish an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. The standards update is effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the new guidance did not impact our consolidated financial statements.



13


NOTE 2-COMPUTATION OF NET (LOSS) INCOME PER SHARE

The computation of net (loss) income per share is as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share data)
Net (loss) income
(6,434
)
 
4,711

 
(16,313
)
 
(2,330
)
Allocation of undistributed earnings to preferred stock
—

 
122

 
—

 
—

Net (loss) income available to common stockholders after allocation for participating securities
$
(6,434
)
 
$
4,589

 
$
(16,313
)
 
$
(2,330
)
Impact of assumed conversions:
 
 
 
 
 
 
 
Interest on 2014 Debentures, net of tax
—

 
1,308

 
—

 
—

Interest on Term B Loan, net of tax
—

 
319

 
—

 
—

Net (loss) income available to common stockholders plus assumed conversions
$
(6,434
)
 
$
6,216

 
$
(16,313
)
 
(2,330
)
Weighted average number of shares - basic
38,630

 
25,302

 
34,601

 
24,951

Effect of dilutive common stock equivalents from:
 
 
 
 
 
 
 
Outstanding stock options
—

 
30

 
—

 
—

Outstanding restricted stock units
—

 
188

 
—

 
—

ESPP shares
—

 
—

 
—

 
—

Convertible preferred stock
—

 
674

 
—

 
—

2014 Debentures
—

 
10,332

 
—

 
—

Term B Loan
—

 
1,887

 
—

 
—

Weighted average number of shares - diluted
38,630

 
38,413

 
34,601

 
24,951

Net (loss) income per common share:
 
 
 
 
 
 
 
Net (loss) income available to common stockholders after allocation for participating securities - Basic
$
(0.17
)
 
$
0.18

 
$
(0.47
)
 
$
(0.09
)
Net (loss) income available to common stockholders - Diluted
$
(0.17
)
 
$
0.12

 
$
(0.47
)
 
$
(0.09
)
Impact of assumed conversions:
 
 
 
 
 
 
 
Interest on 2014 Debentures, net of tax
—

 
0.03

 
—

 
—

Interest on Term B Loan, net of tax
—

 
0.01

 
—

 
—

Net (loss) income available to common stockholders plus assumed conversions
$
(0.17
)
 
$
0.16

 
$
(0.47
)
 
$
(0.09
)

In accordance with ASC Topic 260, Earnings per Share, basic net income and loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period.

For periods in which we report net income, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, shares to be issued under our ESPP, convertible preferred stock, 2014 Debentures and the Term B Loan. Unexercised stock options, restricted stock units, and unvested shares to be issued under our ESPP, are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

Under the two-class method of determining earnings for each class of stock, we consider the dividend rights and participating rights in undistributed earnings for each class of stock. The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an as-converted basis.




14

The following potentially dilutive common shares are excluded from the computation of net loss per share.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
(in thousands)
 
 
Outstanding stock options
2,110

 
1,477

 
2,110

 
1,809

Outstanding restricted stock units
2,031

 
810

 
2,031

 
1,702

ESPP shares
518

 
327

 
518

 
327

Convertible preferred stock
674

 
—

 
674

 
674

2014 Debentures
10,332

 
—

 
10,332

 
10,332

Term B Loan
1,887

 
—

 
1,887

 
1,887

Total potential common stock excluded from calculation
17,552

 
2,614

 
17,552

 
16,731



NOTE 3-INVENTORY
 
June 30, 2013
 
September 30, 2012
 
(in thousands)
Inventory:
 

 
 

Raw materials
$
1,345


$
1,394

Work-in-process
4,186

 
5,359

Finished goods
6,350

 
5,307

Total
$
11,881

 
$
12,060



NOTE 4-DEBT 
 
June 30, 2013
 
September 30, 2012
 
(in thousands)
Term A Loan, 10.5% fixed-rate notes, due February 2014
$
7,963

 
$
8,090

Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014
8,259

 
7,755

Other
4

 
7

2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
43,907

 
42,521

Total debt, net
60,133

 
58,373

Less current portion of debt, net
(7,967
)
 
—

Long-term debt, less current portion, net
$
52,166

 
$
58,373


Additional information about our debt is as follows:
 
Term A Loan
 
Term B Loan
 
2014 Debentures
 
(in thousands)
Principal
$
7,857

 
$
9,342

 
$
46,493

Unaccreted debt premium/(unamortized) debt discount
106

 
(1,083
)
 
(2,586
)
Carrying value
$
7,963

 
$
8,259

 
$
43,907

 
 
 
 
 
 
Interest payable terms
Quarterly, in arrears

 
Quarterly, in arrears

 
Semi-annually, in arrears
Annual effective interest rate
8.2
%
 
17.7
%
 
12.2
%
Conversion rate per common share
n/a

 
$
4.95

 
$
4.50




15

Prepayments on the Term B Loan are permitted at 100% of the principal amount plus accrued interest if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. The conversion terms are substantially similar to the conversion terms of the 2014 Debentures. At June 30, 2013, conversion of the outstanding principal amount of the Term B Loan would result in the issuance of 1.9 million shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash.

The Term A and B Loans are collateralized by substantially all of our assets.

Prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. At June 30, 2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash. The compound embedded derivative, which expired October 30, 2012, was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. Upon expiration of the make-whole payment for forgone interest, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock.

A final valuation was completed on October 30, 2012. We recorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million, from other long-term liabilities, to equity. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.

The credit agreements for the Term A and B Loans and 2014 Debentures provide for customary restrictions and limitations on our ability to incur indebtedness and liens on property, make restricted payments or investments, enter into mergers or consolidations, conduct asset sales, pay dividends or distributions and enter into specified transactions and activities, and also contain other customary default provisions. The agreements provide that we must repurchase, at the option of the holders, indebtedness at its principal amounts plus accrued and unpaid interest upon the occurrence of a fundamental change involving us, as described in the agreements. Upon the occurrence of a fundamental change involving us, the holders of the 2014 Debentures and the Term B Loan may be entitled to receive a “make-whole premium” if they convert their 2014 Debentures or Term B Loan into common stock, payable in additional shares of common stock, if the trading price of our common stock is between $3.20 and $16 per share. Upon the occurrence of certain change in control events, the holders of the Term A and B Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest.

Debt Maturities

Maturity of our total aggregated outstanding debt is as follows:
Fiscal year
 
(in thousands)
2014
 
$
7,857

2015
 
55,835

Total
 
$
63,692


Except for required repurchases upon a change in control or in the event of certain asset sales, as described in the applicable credit agreements, we are not required to make any sinking fund or redemption payments with respect to this debt.


NOTE 5-FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY

The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
2013
 
2012
 
(in thousands)
Beginning balance September 30
$
2,899

 
$
7,796

Transfer to equity
(2,096
)
 
—

Total net gains included in earnings
(803
)
 
1,982

Ending balance June 30
$
—

 
$
9,778


16


There were no transfers in and/or out of Level 1, Level 2 or Level 3 fair value measurements during the nine months ended June 30, 2013 and 2012, respectively.

The compound embedded derivative liability, which was included in long-term liabilities, represented the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the derivative were indexed to our own stock.

We measure the fair value of our Term A and B Loans and 2014 Debentures carried at amortized/accreted cost quarterly for disclosure purposes.

We use a binomial-lattice model to estimate fair values of our Term B Loan and 2014 Debenture financial instruments. The key unobservable input utilized in the model includes a discount rate of 6.4% and 6.5%, respectively. The estimated fair value of our Term A Loan is determined using Level 3 inputs based primarily on the comparability of its terms to the terms we could obtain, for similar instruments, in the current market.

The estimated fair values of our financial instruments are as follows:
 
June 30, 2013
 
September 30, 2012
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
(in thousands)
Term A Loan
$
7,963

 
$
8,239

 
$
8,090

 
$
8,437

Term B Loan
8,259

 
9,963

 
7,755

 
9,776

2014 Debentures
43,907

 
49,910

 
42,521

 
46,725



NOTE 6-STOCKHOLDERS’ EQUITY

Authorized Capital Stock

We are authorized to issue up to 250 million shares of common stock, par value $0.01, per share, of which 19.5 million shares are reserved for future potential issuance upon conversion of debt, 9.3 million shares are reserved for issuance under our stock compensation plans, 1.2 million shares are reserved for issuance under our ESPP, and 0.8 million shares are reserved for issuance upon conversion of Series B Preferred Stock.

We are authorized to issue up to 10 million shares of preferred stock, par value of $0.01 per share, of which 0.8 million shares have been designated as Series B Preferred Stock. As of June 30, 2013, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a five-to-one basis, for an aggregate of 673,600 shares of common stock. The holders of Series B Preferred Stock are entitled to receive, when, as and if declared by our board of directors out of funds legally available for the payment of dividends in respect of our common stock, dividends in an amount equal to 10 percent of par value per share plus the amount of dividends that would have been payable with respect to the shares of common stock issuable upon conversion had such shares of Series B Preferred Stock been fully converted.

In December 2012, we raised $17.1 million, net of offering costs of $1.6 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, based on a negotiated discount to market.

In June 2013, we raised an additional $37.6 million, net of offering expenses of $2.6 million, from the registered public sale of 18,720,000 shares of common stock at $2.15 per share, based on a negotiated discount to market.
On July 18, 2013, all outstanding shares of Series B Preferred Stock were converted into 673,594 shares of common stock.



17

NOTE 7-STOCK BASED COMPENSATION

Stock Options

We have one stock-based plan under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. The options generally vest over four years and expire 10 years from the date of grant.

The Compensation Committee of the Board of Directors determines the stock based compensation grants. The exercise price of options is the closing price on the date the options are granted. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the stock option plans, we have 4.5 million shares available for future grant as of June 30, 2013. The 2013 Incentive Plan (the “Plan”) permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards. The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares for every share subject to the full value award.

As of June 30, 2013, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.

Compensation cost related to our ESPP and stock-based compensation plan is as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Cost of revenues
$
161

 
$
147

 
$
459

 
$
415

Engineering, research and development
428

 
387

 
1,193

 
1,151

Selling, general and administrative
567

 
558

 
1,653

 
1,735

Total stock-based compensation expense
$
1,156

 
$
1,092

 
$
3,305

 
$
3,301


As of June 30, 2013, there was $6.3 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units and our ESPP. The weighted average period over which the unearned stock-based compensation for stock options and restricted stock units expected to be recognized is approximately 1.9 years and 2.2 years, respectively. An estimated forfeiture rate of 5.2% has been applied to all unvested options and restricted stock outstanding as of June 30, 2013.

Activity in stock option awards is as follows:
 
Shares   (in thousands)
 
Weighted average
exercise price
 
Weighted average
remaining
contractual life  (years)
 
Aggregate
intrinsic value (in thousands)
Options outstanding, September 30, 2012
1,813

 
$
16.57

 
6.61

 
$
2

Granted
450

 
2.10

 
—

 
—

Exercised
(1
)
 
2.54

 
—

 
—

Cancelled or expired
(152
)
 
16.31

 
—

 
—

Options outstanding, June 30, 2013
2,110

 
13.52

 
6.89

 
269

Options exercisable, June 30 2013
1,288

 
$
20.16

 
5.84

 
$
71

 
This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $2.63, as of June 30, 2013, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There were 0.3 million in-the-money stock options that were exercisable as of June 30, 2013.

18

The fair value of stock-based awards is estimated at the date of grant using the Black-Scholes option valuation model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. Expected volatility is based on the historical volatility of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SAB No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.

The per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:
 
Nine Months Ended June 30,
 
2013
 
2012
Expected life (in years)
5.65
 
5.64
Expected volatility:
 
 
 
Weighted-average
82.0%
 
87.0%
Range
79.8% - 82.1%
 
85.5% - 87.1%
Expected dividend
—
 
—
Risk-free interest rate
.9% - 1.0%
 
1.1% - 1.3%

The weighted average fair value at the date of grant of options granted in the nine months ended June 30, 2013 and 2012 was $1.43 and $1.80, respectively.

The following table provides additional information in regards to options outstanding as of June 30, 2013:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Price
 
Number Outstanding (in thousands)
 
Weighted Average Remaining Contractual Life (years)
 
Weighted Average Exercise Price
 
Number Exercisable (in thousands)
 
Weighted Average Exercise Price
$2.10
 
427

 
9.68
 
$
2.10

 
107

 
$
2.10

2.15 - 3.33
 
422

 
8.48
 
2.62

 
210

 
2.72

3.80 - 5.20
 
765

 
7.01
 
4.79

 
485

 
4.87

5.40 - 63.60
 
429

 
3.30
 
35.27

 
419

 
36.01

66.40 - 174.80
 
67

 
0.49
 
115.60

 
67

 
115.60

$2.10 - $174.80
 
2,110

 
6.88
 
$
13.52

 
1,288

 
$
20.16


Restricted Stock Units

We grant restricted stock units to certain employees and to our employee and non-employee directors. Grants vest over varying terms, to a maximum of four years from the date of the grant. Awards to non-employee directors upon their initial appointment or election to the board vest in installments of 33.3% each over the first three anniversaries of the grant date, and annual awards to non-employee directors vest 100% on the first anniversary of the grant date. Unvested restricted shares are forfeited if the recipient’s employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors.


19

Activity for our restricted stock award units is as follows:
 
Restricted
Stock Units (in thousands)
 
Weighted Average
Grant-Date Fair
Value per Share
Restricted stock units, September 30, 2012
1,686

 
$
3.49

Awarded
1,509

 
2.11

Released
(1,041
)
 
3.19

Forfeited
(123
)
 
2.96

Restricted stock units, June 30, 2013
2,031

 
$
2.65


We issue restricted stock units as part of our equity incentive plans. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $0.6 million for the nine months ended June 30, 2013, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit. Although shares withheld are not issued, they are treated as common stock repurchases in our unaudited consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.

Employee Stock Purchase Plan

In January 2011, our stockholders approved the ESPP under which 2.5 million shares of common stock were reserved for issuance. As of June 30, 2013, the ESPP had 1.2 million shares available for issuance. As of June 30, 2013, approximately 49% of the eligible employees participated in our stock purchase plan. On July 31, 2013, 0.4 million shares were issued at a price per share of $1.77, a 15% discount to the share price on that date, for the purchase period that began on February 1, 2013 and ended July 31, 2013. A new purchase period began on August 1, 2013 and ends January 31, 2014.

The fair value of the ESPP awards are calculated in accordance with ASC Topic 718-50, Employee Share Purchase Plans, under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following range of assumptions for both purchase periods: expected useful life of 0.5 years, weighted average expected volatility of 47.6% to 49.8%, a zero dividend rate, and a risk-free interest rate of 0.1% to 0.2%. We recognized approximately $0.4 million in ESPP stock compensation for both the nine months ended June 30, 2013 and 2012, respectively.


NOTE 8-INCOME TAXES

The provision for income taxes as a percentage of loss from operations before income taxes was 4.6% for the nine months ended June 30, 2013 compared to (140.9)% for the comparable period in the prior year. Our effective tax rate is primarily impacted by certain foreign taxes, certain nondeductible interest and share based expenses,  the release of a portion of the valuation allowance related to certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period, and for the nine months ended June 30, 2013, by a refund of withholding taxes previously paid on certain foreign income.

At June 30, 2013, we had approximately $90.2 million of Federal Net Operating Losses (“NOLs”) that can be used in future tax years. In December 2012, we issued 10.7 million shares of common stock in a public offering which is believed to have resulted in a Section 382 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the nine months ended June 30, 2013, or on our net deferred tax asset as of June 30, 2013. In addition, as a result of this ownership change, substantially all of our federal NOLs, credits and certain built-in deductions or losses are subject to an annual limitation of $1.4 million. Consequently, it is anticipated that a substantial portion of the federal NOLs, credits and built-in losses will expire unutilized as a result of this limitation. In June 2013, we issued an additional 18.7 million shares of common stock in a public offering. We are in the process of evaluating whether the offering caused a Section 382 ownership change. If an additional ownership change should occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

20

 
NOTE 9-SEGMENT AND GEOGRAPHIC INFORMATION

We manage and operate our business through one operating segment.

Net revenues from customers that were equal to or greater than 10% of total net revenues are as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Tellabs
10.3
%
 
*

 
*

 
*

WPG Holdings**
19.2
%
 
13.9
%
 
16.4
%
 
12.8
%
Nu Horizons Electronics**
*

 
10.7
%
 
*

 
14.3
%
 __________________________________________________
*Less than 10% of total net revenues for period indicated.
**Distributor

Net revenues by geographic area are as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
United States
$
5,590

 
$
9,545

 
$
23,693

 
$
32,543

Asia Pacific
16,856

 
17,550

 
42,957

 
45,502

EMEA*
3,972

 
3,192

 
10,248

 
11,970

Total net revenues
$
26,418

 
$
30,287

 
$
76,898

 
$
90,015

________________________________________________
*Europe, Middle East and Africa

Revenues by geographic area are based upon the country of billing. The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users.

We believe a substantial portion of the products billed to original equipment manufacturer (“OEM”) and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.

Product revenues by product line are as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Connectivity
$
12,199

 
$
10,761

 
$
32,172

 
38,433

Ethernet switching
9,541

 
8,402

 
28,178

 
23,202

Transport processing
4,545

 
6,567

 
14,529

 
20,232

Product revenues
$
26,285

 
$
25,730

 
$
74,879

 
$
81,867



NOTE 10-COMMITMENTS AND CONTINGENCIES

We are involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in substantial amounts.

During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to make future payments under specific circumstances. We review our exposure under these agreements no less than annually, or more frequently when events indicate. Except for our established warranty reserves, we do not expect that any potential payments in connection with any of these indemnity obligations would have a material adverse effect on our consolidated financial position. Accordingly, except for established warranty reserves, we have not recorded any liabilities for these agreements as of June 30, 2013 and September 30, 2012.

21


Patents and Licenses

We have entered into various licensing agreements requiring primarily fixed fee royalty payments. Certain of these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that we fail to pay any minimum annual royalties, these licenses may automatically be terminated.

Warranties

We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods.

Intellectual Property Indemnities

We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnifications.

Director and Officer Indemnities and Contractual Guarantees

We have entered into indemnification agreements with our directors and executives, which require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities.

We have also entered into severance and change-of-control agreements with certain of our executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment
with us.

General Contractual Indemnities/Product Liability 
During the normal course of business, we enter into contracts with customers where we agreed to indemnify the other party for personal injury or property damage caused by our products. Our indemnification obligations under such agreements are not generally limited in amount or duration. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such indemnities have not had a material negative effect on our business, financial condition or results of operations. We maintain general liability insurance which may provide a source of recovery to us in the event of an indemnification claim.


22

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

Cautionary Statement

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, 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, as well as in our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A
(“Annual Report”) and in our other filings with the SEC, which discuss our business in greater detail.
 
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to historical or current fact. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning,” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash commitments, and expenses. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in the subsection entitled “Risk Factors” in Part II, Item 1A of this Report and Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

We are a leading supplier of high-performance ICs that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. We design, develop and market a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 25 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.
Carrier and Enterprise networks have experienced a dramatic increase in both bandwidth demands and complexity driven by the introduction of new content-rich services, the convergence of voice, video and data, and enhanced 4G/LTE mobile networks. Media-rich devices such as smartphones and game consoles require increased bandwidth. New Enterprise deployment options such as cloud based servers, social media and tele-presence have also increased demand.
These trends have forced a significant transition and consolidation of both Carrier and Enterprise networks to all-IP and packet-based Ethernet networks that can scale in terms of services, bandwidth and capability while lowering power consumption and acquisition and operations costs. These networks are based on technology that is significantly more sophisticated, service-aware, secure and reliable than traditional Enterprise-grade Ethernet Local Area Network (“LAN”) technology. Such networks are built on new technology that is often referred to as “Carrier Ethernet” in Carrier networks and “Converged Enhanced Ethernet” in Enterprise networks.

Realization of Our Strategy

Several years ago, we embarked on the strategic mission of re-inventing Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets. Our objective is to be the leading supplier of high-performance ICs for the global communications infrastructure markets. Thus, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products and obtain new customers in an effort to diversify ourselves and provide new opportunities for growth.

In order to optimize the efficiency of our R&D team we chose to serve two large, growing, independent markets which rely increasingly on Ethernet technology: Carrier networking and Enterprise networking. We estimate our total addressable market to have a compound annual growth rate (“CAGR”) of 17% and to approach $2.1 billion by 2016. The Carrier networking market includes core, metro and access equipment used for transport, switching, routing and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in small-medium enterprise (“SME”) networks, small-medium business (“SMB”), and cloud and security appliances. While both market segments are unique, there is tremendous synergy and cost savings in terms of R&D effort for Ethernet switch and PHY devices allowing us to address these two large markets. Within the Carrier networking segment, our focus and growth is driven

23

by mobile backhaul applications, and within the Enterprise networking segment our focus and growth is driven by the migration from 100 Mbps to 1 GE and 10 GE port speeds. In both markets, Vitesse provides unique low power and low cost solutions by optimizing the feature set for target applications.

As with any high technology company, growth opportunities begin with new products. Over the past three years, we introduced over 60 new products, including many new “platform” products and technologies that will serve as the basis for future product development. These new products allowed us to substantially increase our served markets in both Carrier and Enterprise networking.

The next step to generating growth is creating market traction and design wins where we are selected by our customers over our competitors. As we have taken our new products to market, we have seen an increase in our customer engagements and the number of design opportunities that were being identified by our sales team. Early adoption of our products by our customers has exceeded our goals. In the past two years, we recorded over 600 new design wins.

Together with our customers, we are now preparing to ramp these new products. In our industry it typically takes six to 24 months for our customers to go from first product sample received to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network. In 2012, we shipped samples and entered pre-production on the majority of our new products, and we expect our customers to phase into volume production over the course of 2013.

In 2012, we began a migration of our revenues to our new product portfolio. In 2011, only 6% of our product revenues were from our new product portfolio. In 2012, this grew to 14% of product revenues. New product revenues totaled 29% and 26%, respectively, for product revenues in the three and nine months ended June 30, 2013.

Augmenting our product revenues, we leverage our substantial intellectual property portfolio to generate revenues. Our primary focus for intellectual property licensing has been our Gigabit Ethernet Copper PHY and switch cores, and our eFEC technology that we license to non-competing third-parties in adjacent or similar markets.

We have also made progress on our strategy to strengthen our operational performance and execution. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an enhanced customer-centric focus. During the last three years, we accelerated our comprehensive effort to reduce our operating expenses, which has substantially increased our operating leverage.


Critical Accounting Policies and Estimates

Our accounting policies are more fully described in Note 1 of the unaudited consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances. We regularly discuss with our audit committee the basis of our estimates. These estimates could change under different assumptions
or conditions.

We believe that our critical accounting policies and estimates, as described in our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A, are our most critical accounting policies and are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. There have been no significant changes to these policies during the nine months ended June 30, 2013.


Impact of Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements see “The Company and Its Significant Accounting Policies” footnote in the accompanying notes to the unaudited consolidated financial statements.



24

Results of Operations for the three and nine months ended June 30, 2013, as compared to the three and nine months ended June 30, 2012

The following table sets forth certain Unaudited Consolidated Statements of Operations data for the periods indicated.
The percentages in the table are based on net revenues.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
 
(in thousands, except for percentages)
Net revenues:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Product revenues
$
26,285

 
99.5
 %
 
$
25,730

 
85.0
 %
 
$
74,879

 
97.4
 %
 
$
81,867

 
90.9
 %
Intellectual property revenues
133

 
0.5
 %
 
4,557

 
15.0
 %
 
2,019

 
2.6
 %
 
8,148

 
9.1
 %
Net revenues
26,418

 
100.0
 %
 
30,287

 
100.0
 %
 
76,898

 
100.0
 %
 
90,015

 
100.0
 %
Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Cost of product revenues
11,666

 
44.2
 %
 
11,270

 
37.2
 %
 
34,010

 
44.2
 %
 
34,028

 
37.8
 %
Engineering, research and development
11,706

 
44.3
 %
 
10,513

 
34.7
 %
 
31,987

 
41.6
 %
 
32,518

 
36.1
 %
Selling, general and administrative
7,257

 
27.5
 %
 
6,296

 
20.8
 %
 
22,617

 
29.4
 %
 
22,131

 
24.5
 %
Amortization of intangible assets
80

 
0.3
 %
 
88

 
0.3
 %
 
266

 
0.3
 %
 
234

 
0.3
 %
Costs and expenses
30,709

 
116.3
 %
 
28,167

 
93.0
 %
 
88,880

 
115.5
 %
 
88,911

 
98.7
 %
(Loss) income from operations
(4,291
)
 
(16.3
)%
 
2,120

 
7.0
 %
 
(11,982
)
 
(15.5
)%
 
1,104

 
1.3
 %
Other expense (income):
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Interest expense, net
1,983

 
7.5
 %
 
1,950

 
6.4
 %
 
5,919

 
7.7
 %
 
5,823

 
6.5
 %
Gain on compound embedded derivative
—

 
—
 %
 
(5,755
)
 
(19.0
)%
 
(803
)
 
(1.0
)%
 
(3,773
)
 
(4.2
)%
Other expense (income), net
31

 
0.1
 %
 
(20
)
 
(0.1
)%
 
5

 
—
 %
 
21

 
—
 %
Other expense (income), net
2,014

 
7.6
 %
 
(3,825
)
 
(12.7
)%
 
5,121

 
6.7
 %
 
2,071

 
2.3
 %
(Loss) income before income tax expense (benefit)
(6,305
)
 
(23.9
)%
 
5,945

 
19.7
 %
 
(17,103
)
 
(22.2
)%
 
(967
)
 
(1.0
)%
Income tax expense (benefit)
129

 
0.5
 %
 
1,234

 
4.1
 %
 
(790
)
 
(1.0
)%
 
1,363

 
1.5
 %
Net (loss) income
$
(6,434
)
 
(24.4
)%
 
$
4,711

 
15.6
 %
 
$
(16,313
)
 
(21.2
)%
 
$
(2,330
)
 
(2.5
)%

Product Revenues

We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) Non-core. The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in SME and SMB networks and cloud access services. The Non-core market is comprised of products that have not received additional investment over the last five years and, as a result, have generally been in decline.

The demand for our products is affected by various factors, including our development and introduction of new products, availability and pricing of competing products, capacity constraints at our suppliers, end-of-life (“EOL”) product decisions, and general economic conditions. Therefore, our revenues for the three and nine months ended June 30, 2013 may not necessarily be indicative of future revenues.


25

Product revenues by market are as follows:
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Carrier networking
$
14,368

 
54.7
%
 
$
11,610

 
45.1
%
 
$
2,758

 
23.8
 %
Enterprise networking
11,368

 
43.2
%
 
13,529

 
52.6
%
 
(2,161
)
 
(16.0
)%
Non-core
549

 
2.1
%
 
591

 
2.3
%
 
(42
)
 
(7.1
)%
Product revenues
$
26,285

 
100.0
%
 
$
25,730

 
100.0
%
 
$
555

 
2.2
 %

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Carrier networking
$
41,497

 
55.4
%
 
$
33,199

 
40.6
%
 
$
8,298

 
25.0
 %
Enterprise networking
31,884

 
42.6
%
 
41,104

 
50.2
%
 
(9,220
)
 
(22.4
)%
Non-core
1,498

 
2.0
%
 
7,564

 
9.2
%
 
(6,066
)
 
(80.2
)%
Product revenues
$
74,879

 
100.0
%
 
$
81,867

 
100.0
%
 
$
(6,988
)
 
(8.5
)%

The increase in Carrier networking revenues in the three months ended June 30, 2013, as compared to the same period in the prior year is largely attributable to a doubling in sales of our new products, particularly 1GbE copper PHYs, crosspoint switches and 10GbE PHY products. We also saw an increase in revenues from our legacy SONET framers going through EOL. Increases were partially offset by declines in some of our other SONET-based product revenues. The increase in Carrier networking revenues in the nine months ended June 30, 2013, as compared to the same period in the prior year is due to strong new product revenues and sales of SONET framers going through EOL, partially offset by lower revenues from switch fabric products that had gone through EOL in the prior year and other mature products.

The decrease in Enterprise networking revenues in the three and nine months ended June 30, 2013, as compared to the same periods in the prior year, was primarily due to lower revenues from switch fabric products that had gone through EOL in the prior year. The decrease was partially offset by an increase in new Enterprise Ethernet switch product revenues.

Non-core revenues in the three months ended June 30, 2013, are comparable to those in the same period in the prior year. The decrease in Non-core revenues in the nine months ended June 30, 2013 as compared to the same period in the prior year is largely attributable to a decrease of our mature Fibre Channel products, which had a large purchase by a single customer in the prior year and a decrease of legacy network processing unit (“NPU”) products which had high EOL revenues in the prior year.

Revenues from EOL products totaled $3.6 million and $6.4 million in the three months ended June 30, 2013 and 2012, respectively, and $12.4 million and $19.9 million in the nine months ended June 30, 2013 and 2012, respectively. Product phase-outs are part of our normal course of business, and we will continue this practice in the future. From time-to-time, upon customer request or due to a change in our product strategy, we may decide to resume producing a part we previously phased-out.


26

We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.

Product revenues by product line are as follows:
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Connectivity
$
12,199

 
46.4
%
 
$
10,761

 
41.8
%
 
$
1,438

 
13.4
 %
Ethernet switching
9,541

 
36.3
%
 
8,402

 
32.7
%
 
1,139

 
13.6
 %
Transport processing
4,545

 
17.3
%
 
6,567

 
25.5
%
 
(2,022
)
 
(30.8
)%
Product revenues
$
26,285

 
100.0
%
 
$
25,730

 
100.0
%
 
$
555

 
2.2
 %

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Connectivity
$
32,172

 
43.0
%
 
$
38,433

 
47.0
%
 
$
(6,261
)
 
(16.3
)%
Ethernet switching
28,178

 
37.6
%
 
23,202

 
28.3
%
 
4,976

 
21.4
 %
Transport processing
14,529

 
19.4
%
 
20,232

 
24.7
%
 
(5,703
)
 
(28.2
)%
Product revenues
$
74,879

 
100.0
%
 
$
81,867

 
100.0
%
 
$
(6,988
)
 
(8.5
)%

The increase in Connectivity revenues in the three months ended June 30, 2013, as compared to the same period in the prior year, is largely attributable to the increase in new crosspoint switch and 10GbE PHY products selling into the Carrier market. The decrease in Connectivity revenues in the nine months ended June 30, 2013 as compared to the same period in the prior year is largely attributable to the decrease in legacy products for Fibre Channel applications, which had a large purchase by a single customer in the prior period, and to a decrease in mature SONET-based PHY products.

The increase in Ethernet switching revenues in the three and nine months ended June 30, 2013 as compared to the same period in the prior year, is largely attributable to our new switches selling into both the Carrier and Enterprise networking market. The increase was partially offset by a decrease in sales of our other mature products.

The decrease in Transport processing revenues in the three months ended June 30, 2013, as compared to the same period in the prior year, is largely attributable to lower sales of switch fabrics going through EOL. The decrease was partially offset by increased sales of framers going through EOL. The decrease in Transport processing revenues in the nine months ended June 30, 2013, as compared to the same period in the prior year is attributable to lower sales of switch fabrics, NPUs, and optical transport network products going through EOL, offset by increased sales of framers going through EOL.



27

Intellectual Property Revenues
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Intellectual property revenues
$
133

 
0.5
%
 
$
4,557

 
15.0
%
 
$
(4,424
)
 
(97.1
)%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Intellectual property revenues
$
2,019

 
2.6
%
 
$
8,148

 
9.1
%
 
$
(6,129
)
 
(75.2
)%

Intellectual property revenues decreased in the three and nine months ended June 30, 2013, as compared to the same period in the prior year, due to a decrease in deliveries of intellectual property. The timing and amounts of intellectual property revenues fluctuate and tend to be unpredictable. Costs associated with the sale of intellectual property are included in selling, general and administrative expenses.

Net revenues from customers that were equal to or greater than 10% of total net revenues are as follows:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Tellabs
10.3
%
 
*

 
*

 
*

WPG Holdings**
19.2
%
 
13.9
%
 
16.4
%
 
12.8
%
Nu Horizons Electronics**
*

 
10.7
%
 
*

 
14.3
%
 
______________________________________
*Less than 10% of total net revenues for period indicated.
**Distributors

Net revenues by geographic area are as follows:
 
Three Months Ended June 30,
 
2013
 
2012
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
(in thousands, except percentages)
United States
$
5,590

 
21.2
%
 
$
9,545

 
31.5
%
Asia Pacific
16,856

 
63.8
%
 
17,550

 
58.0
%
EMEA*
3,972

 
15.0
%
 
3,192

 
10.5
%
Net revenues
$
26,418

 
100.0
%
 
$
30,287

 
100.0
%
 

 
Nine Months Ended June 30,
 
2013
 
2012
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
(in thousands, except percentages)
United States
$
23,693

 
30.8
%
 
$
32,543

 
36.2
%
Asia Pacific
42,957

 
55.9
%
 
45,502

 
50.5
%
EMEA*
10,248

 
13.3
%
 
11,970

 
13.3
%
Net revenues
$
76,898

 
100.0
%
 
$
90,015

 
100.0
%
______________________________________
*Europe, Middle East and Africa


28

Revenues by geographic area are based upon the country of billing. The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users. We believe a substantial portion of the products billed to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.

Cost of Product Revenues
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 

Cost of product revenues
$
11,666

 
44.4
%
 
$
11,270

 
43.8
%
 
$
396

 
3.5
%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 

Cost of product revenues
$
34,010

 
45.4
%
 
$
34,028

 
41.6
%
 
$
(18
)
 
(0.1
)%

We use third-parties for wafer fabrication as well as test and assembly services. Cost of product revenues consists predominantly of: (i) purchased finished wafers; (ii) assembly services; (iii) test services; and (iv) labor and overhead costs associated with product procurement, planning and quality assurance.

Our cost of product revenues is affected by various factors, including product mix, volume, provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their life-cycles. Our cost of product revenues as a percentage of net product revenues is affected by these factors, as well as customer mix, pricing, and competitive pricing programs.

The overall increase in cost of product revenues as a percentage of product revenues is due to a mix shift toward new products and away from products going through EOL which have higher gross margins. New products typically start out with higher costs as a percentage of revenues, which decrease with increased volumes and improved manufacturing efficiencies.

Engineering, Research and Development
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Engineering, research and development
$
11,706

 
44.3
%
 
$
10,513

 
34.7
%
 
$
1,193

 
11.3
%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Engineering, research and development
$
31,987

 
41.6
%
 
$
32,518

 
36.1
%
 
$
(531
)
 
(1.6
)%

R&D expenses consist primarily of compensation expenses for employees engaged in research, design and development activities. R&D also includes costs of mask sets, which we fully expense in the period, and electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and
facilities expenses.


29

The level of R&D expense will vary from period-to-period, depending on timing of development projects and the purchase of masks aligned to those projects. The level of R&D expense as a percentage of net revenues will vary, depending, in part, on the level of net revenues. Our R&D efforts are critical to maintaining a high level of new product introductions and are critical to our plans for future growth.

The increase in R&D expense in the three months ended June 30, 2013, as compared to the same period in the prior year is primarily attributable to $0.7 million increased spending for masks and test wafers, and $0.6 million for contractors providing new product development and design services.

The decrease in R&D expense in the nine months ended June 30, 2013, as compared to the same period in the prior year, is primarily attributable to $0.6 million lower spending for masks and test wafers and lower facility expenses of $1.2 million partially offset by increased expense of $1.7 million for contractors providing new product development and design services.

We continue to concentrate our spending in R&D to meet customer requirements and to respond to market conditions, and we do not anticipate that the reduction in R&D spending in the current year will impact product development.

Selling, General and Administrative
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Selling, general and administrative
$
7,257

 
27.5
%
 
$
6,296

 
20.8
%
 
$
961

 
15.3
%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Selling, general and administrative
$
22,617

 
29.4
%
 
$
22,131

 
24.5
%
 
$
486

 
2.2
%

Selling, general and administrative (“SG&A”) expense consists primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor and communication expenses.

The increase in SG&A expense in the three months ended June 30, 2013, as compared to the same period in the prior year, is primarily due to $1.3 million of collections of accounts receivable in the prior year we had previously written off as uncollectible.

The increase in SG&A expense in the nine months ended June 30, 2013, as compared to the same period in the prior year, is primarily due to $1.5 million of collections of accounts receivable in the prior year we had previously written off as uncollectible, and a $0.5 million increase in asset retirement obligation expense as we move from our primary Camarillo facility to an adjacent facility, partially offset by lower personnel related expenses of $1.0 million and a $0.7 million intangible asset writedown in the prior year.


30

Interest Expense, Net
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Interest expense, net
$
1,983

 
7.5
%
 
$
1,950

 
6.4
%
 
$
33

 
1.7
%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Interest expense, net
$
5,919

 
7.7
%
 
$
5,823

 
6.5
%
 
$
96

 
1.6
%

Net interest expense is comprised of cash interest expense, amortization of debt discount, premium, and debt issuance cost, net of interest income. Net interest expense for the three and nine months ended June 30, 2013 is comparable to the same periods last year.


Gain on Compound Embedded Derivative
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Gain on compound embedded derivative
$
—

 
—
%
 
$
(5,755
)
 
(19.0
)%
 
$
5,755

 
(100.0
)%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Gain on compound embedded derivative
$
(803
)
 
(1.0
)%
 
$
(3,773
)
 
(4.2
)%
 
$
2,970

 
(78.7
)%

The gain on our compound embedded derivative included in our 2014 Debentures for the nine months ended June 30, 2013, is primarily generated by the decrease in the price of our underlying common stock during those periods.

The compound embedded derivative included in our 2014 Debentures required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock. A final valuation was completed on October 30, 2012, resulting in gain of $0.8 million due to the change in fair value.


31

Income Tax (Benefit) Expense
 
Three Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Income tax expense (benefit)
$
129

 
0.5
%
 
$
1,234

 
4.1
%
 
$
(1,105
)
 
(89.5
)%

 
Nine Months Ended June 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Income tax expense (benefit)
$
(790
)
 
(1.0
)%
 
$
1,363

 
1.5
%
 
$
(2,153
)
 
(158.0
)%

Our effective tax rate is primarily impacted by certain foreign taxes, certain nondeductible interest and share based expenses and the release of a portion of the evaluation allowance related to certain foreign jurisdictions’ deferred tax assets as such balance were more likely than not realizable within the applicable carryforward period. Our effective tax rate for the nine months ended June 30, 2013 was 4.6% which was lower than the federal and state statutory rate due to the projected federal and state losses for the fiscal year as well as the related valuation allowances.

Financial Condition and Liquidity

Cash Flow Analysis

Cash increased to $71.3 million at June 30, 2013, from $23.9 million at September 30, 2012. During the nine months ended June 30, 2013, we used cash for operations and investing activities, which was offset by cash provided by financing activities. Our cash flows from operating, investing and financing activities are summarized as follows:
 
Nine Months Ended June 30,
 
2013
 
2012
 
(in thousands)
Net cash (used in) provided by operating activities
$
(5,840
)
 
$
5,210

Net cash used in investing activities
(761
)
 
(1,317
)
Net cash provided by (used in) financing activities
54,045

 
(625
)
Net increase in cash
47,444

 
3,268

Cash at beginning of period
23,891

 
17,318

Cash at end of period
$
71,335

 
$
20,586


Net Cash (Used In) Provided by Operating Activities

During the nine months ended June 30, 2013, cash used in operations totaled $5.8 million.  Excluding changes in working capital, we used $9.3 million to fund the cash portion of our net loss. We used cash to fund increases in accounts receivable and prepaid expenses totaling $1.8 million. These uses were offset by lower inventory of $0.2 million and higher deferred revenue, accounts payable and accrued expense liabilities totaling $5.1 million.

Accounts receivable increased $1.0 million from $9.4 million at September 30, 2012, to $10.4 million at June 30, 2013, primarily due to higher revenues and timing of sales during the quarter ended June 30, 2013. Inventory decreased $0.2 million from $12.1 million at September 30, 2012, to $11.9 million at June 30, 2013, primarily due to decreased inventories held by distributors. Accounts payable, accrued expenses and other liabilities increased by $3.2 million, excluding the impact of unpaid equity offering costs, from $18.5 million at September 30, 2012, to $21.9 million at June 30, 2013, due to the timing of obligations and/or payments to our vendors and other service providers. Deferred revenue increased $1.9 million from $0.9 million at September 30, 2012, to $2.8 million at June 30, 2013, due to the timing of payments from distributors.

During the nine months ended June 30, 2012, cash provided by operating activities totaled $5.2 million. We used $1.1 million cash to fund the increase in accounts receivable. We used $1.6 million cash to pay down accounts payable and accrued

32

expenses and $1.3 million related to a decrease in deferred revenue due to lower purchases from distributors. These uses were offset by the generation of $6.1 million cash from operating with lower inventory levels. Excluding changes in working capital, cash generated by operations totaled $2.8 million.

Accounts receivable increased $1.1 million from $9.6 million at September 30, 2011, to $10.7 million at June 30, 2012, resulting from timing of sales. Inventory decreased $6.1 million from $20.9 million at September 30, 2011, to $14.8 million at June 30, 2012 due to ongoing efforts to ensure purchases align with production. Accounts payable, accrued expenses and other liabilities decreased by $1.6 million from $21.6 million at September 30, 2011, to $20.0 million at June 30, 2012, due to the timing of obligations and/or payments to our vendors and other service providers.

Net Cash Used In Investing Activities

Investing activities used cash in the nine months ended June 30, 2013, for capital expenditures of $0.6 million and payments under licensing agreements of $0.3 million. Expenditures were partially offset by cash provided by the sale of capital assets of $0.2 million. Investing activities used cash in the nine months ended June 30, 2012, for capital expenditures of $0.5 million and payments under licensing agreements of $0.8 million.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities during the nine months ended June 30, 2013, totaled $54.0 million. Cash from the sale of common stock totaled $54.7 million, net of approximately $4.2 million in expenses, Offering costs of $0.2 million were incurred, but unpaid as of June 30, 2013. Proceeds from the sale of common stock were offset by $0.6 million in cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employees. During the nine months ended June 30, 2012, financing activities used $0.6 million in cash primarily for the repurchase of restricted stock units for payroll taxes.


Capital Resources, including Long-Term Debt, Contingent Liabilities and Operating Leases

Prospective Capital Needs

Our principal sources of liquidity are our existing cash, cash generated from product sales, cash generated from the sales or licensing of our intellectual property, and during the nine months ended June 30, 2013, cash generated from the sale of our common stock. Our cash totaled $71.3 million at June 30, 2013. Our working capital at June 30, 2013, was $64.6 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase revenues. We have completed a series of cost reduction actions that have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for our products. We believe that our existing cash, along with cash expected to be generated from product sales and the sale or licensing of our intellectual property, and the careful management of working capital requirements, will be sufficient to fund our operations and R&D efforts, anticipated capital
expenditures, working capital, and other financing requirements for the next 12 months. In order to increase our working capital, we may seek to obtain additional debt or equity financing. However, we cannot assure you that such financing will be available to us on favorable terms, or at all, particularly in light of recent economic conditions in the capital markets.

Our short-term debt is comprised of our Term A loan (“Term A Loan”), of which the total principal amount of $7.9 million is due in February 2014. Our long term debt is comprised of our Term B loan (“Term B Loan”) and our convertible subordinated debentures due October 2014 (“2014 Debentures”), of which the total principal amount of $55.8 million is due in October 2014. We currently anticipate that cash on hand and cash provided by operating activities will be sufficient to permit us to pay the entire amount of this indebtedness when due in February and October 2014. To fund ongoing operating cash requirements, however, we anticipate we will need to secure additional funding. We have engaged the services of financial advisory firms to assist us in evaluating possible financing transactions to fund working capital. These transactions include, among others that we may consider from time to time, an extension of the maturity date and other modification of our Term A and B Loans, and the refinancing of indebtedness from the proceeds of one or more new credit facilities. We will pursue these and other potential transactions until we provide for the ongoing operating cash requirements of our business. There can be no assurance, however, that our efforts will be successful.

33

We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. As of June 30, 2013, we raised a total of $58.8 million in gross proceeds from the sale of 29,371,280 shares of our common stock, leaving approximately $16.2 million available pursuant to the Form S-3. The Form S-3 expires on December 27, 2014.

Contractual Obligations
 
Payment Obligations by Fiscal Year
 
Remaining
in 2013
 
2014-2015
 
2016-2017
 
2018 and
thereafter
 
Total
 
(in thousands)
Convertible subordinated debt (1)
$
—

 
$
46,493

 
$
—

 
$
—

 
$
46,493

Term A Loan (2)
—

 
7,857

 
—

 
—

 
7,857

Term B Loan (3)
—

 
9,342

 
—

 
—

 
9,342

Loan interest (4)
397

 
7,332

 
—

 
—

 
7,729

Operating leases (5)
813

 
3,154

 
199

 
—

 
4,166

Software licenses (6)
1,754

 
14,367

 
5,600

 
2,800

 
24,521

Inventory and related purchase obligations (7)
4,649

 
1,676

 
120

 
—

 
6,445

Total
$
7,613

 
$
90,221

 
$
5,919

 
$
2,800

 
$
106,553

_________________________________________________
(1)
Convertible subordinated debt represents amounts due for our 8.0% convertible debentures due October 2014.

(2)
Term A Loan represents amounts due for our 10.5% fixed rate senior notes due February 2014.

(3)
Term B Loan represents amounts due for our 8.0% fixed rate senior notes due October 2014.

(4)
Interest payable for Term A Loans, Term B Loans and convertible subordinated debt through October 2014.

(5)
We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016.

(6)
Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products.

(7)
Inventory and related purchase obligations represent non-cancellable purchase commitments for wafers and substrate parts. For purposes of the table above, inventory and related purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time.

Off-Balance Sheet Arrangements

At June 30, 2013, we had no material off-balance sheet arrangements, other than operating leases.


34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our quantitative and qualitative disclosures about market risk are described in our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A. There have been no material changes to these risks during the nine months ended June 30, 2013.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated as of June 30, 2013, the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2013, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, during the quarter ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Controls

Our disclosure controls and procedures provide our Chief Executive Officer and Chief Financial Officer reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.



35

PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

From time-to-time in our normal course of business, we are a party to various legal claims, actions and complaints. Although the ultimate outcome of these matters cannot be determined, management believes that, as of June 30, 2013, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.


ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2012, as amended by Amendment No. 1 to Annual Report on Form 10-K/A.

ITEM 6. EXHIBITS
Exhibit
 
 
 
Incorporated by Reference
 
Filed or Furnished
Number
 
Exhibit Description
 
Form
 
File Number
 
Exhibit
 
Filing Date
 
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1*
 
Employment Agreement between the Registrant and Christopher Gardner dated January 30, 2013.
 
 
 
 
 
 
 
 
 
X
10.2*
 
Vitesse Semiconductor Corporation 2013 Incentive Plan
 
8-K
 
001-31614
 
10.1

 
March 8, 2013
 
 
31.1
 
Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
31.2
 
Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
32.1
 
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
101.INS
 
XBRL Instance Document**
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document**
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document**
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document**
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document**
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document**
 
 
 
 
 
 
 
 
 
X
_____________________________________________________
*
Each a management contract or compensatory plan or arrangement.
**
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.




36

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

August 6, 2013
VITESSE SEMICONDUCTOR CORPORATION
 
 
 
 
 
 
 
By:
/s/ CHRISTOPHER R. GARDNER
 
 
Christopher R. Gardner
 
 
Chief Executive Officer
 
 
 
August 6, 2013
VITESSE SEMICONDUCTOR CORPORATION
 
 
 
 
 
 
 
By:
/s/ MARTIN S. MCDERMUT
 
 
Martin S. McDermut
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)



37